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First, it can be achieved via a controlled nominal appreciation of the yuan.
The simplest way to do that is for the currency to strengthen, but the peg prevents nominal appreciation.
Mr. Garnaut says China's real exchange rate will rise rapidly come what may — either via nominal appreciation or inflation.
In fact, the increasing importance of cheap imports was a major contributing factor to the low-inflation environment of the last decade (this recent post on Free Exchange frames the magnitude nicely).If the American trade deficit is reduced via either Chinese inflation or a nominal appreciation of the yuan, the disinflationary effect of cheap Chinese imports will be reversed.
(That doesn't mean that nominal appreciation wouldn't be a good idea anyway; it's less distortionary than rampant domestic inflation, particularly given the repressive measures the government has used to slow down price growth).Anyway, the data also seem to be pointing toward an improvement in trade balances.
That adjustment is in its real exchange rate, which can occur either through a nominal appreciation or by keeping the yuan unchanged and wages and prices rising faster than in other countries; and there is increasing evidence that this is happening.
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It's plausible that with good deflation of about 1.5%, nominal stock appreciation will run about 1% annually, as spelled out in my June 23 column.
What I thought was a little more interesting in his comments was the notion that there's a bit of a trade-off between nominal exchange rate appreciation and inflation, such that China has a limited ability to push up the real value of the yuan by all that much more than it's currently doing.
Households received a nominal sum in appreciation for their participation.
Under current law, it is possible to set up a GRAT that will result in no taxable gift, or a nominal one, even if considerable appreciation goes to the trust's beneficiaries.
Since June, when China pledged to allow its currency, the renminbi, to move more freely, it has appreciated by about 3 percent against the dollar in nominal terms, or an annualized rate of about 6 percent, though the appreciation is greater in real terms because inflation in China is higher than in the United States.
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