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Currency MANipulation: Sex ratio drives yuan lower

NIR ELIAS/NIR ELIAS/REUTERS

Marina Adshade is an economist at Dalhousie University. She writes regularly on the economics of sex and love on her blog Dollars and Sex



Since the announcement of China's central bank in June to allow more flexibility in the Chinese exchange rate, the Yuan has appreciated nearly 4 per cent. The latest figures (released on Friday) suggest that the yuan is now trading at a new high of 6.5671 yuan/U.S. Dollar.



This probably won't quell international pressure from China's trading partners, including Canada, for even greater currency flexibility, but new research produced by economists at Columbia University suggests that Western central bankers are mistaken in their belief that the Chinese currency is grossly undervalued.

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They argue that the low real exchange rate is not completely the result of currency manipulations but rather has been created by a skewed sex ratio that has left millions of Chinese men with little prospect for marriage.

The Chinese Academy of Social Sciences has recently predicted that more than 24 million Chinese men of marrying age could find themselves with no prospect for marriage by 2020. The cause of this gender imbalance, of course, is that the sex ratio at birth in China has been increasing since the one child policy was introduced in the late 1970's.



Having only one child creates intense pressure by the family for that child to eventually marry and produce a grandchild. With a shortage of possible wives, families are increasing their savings rates in the hope of improving their son's competitiveness on the marriage market. And for that same reason, young men are supplying more labour in the hopes of generating enough wealth to find a mate.

Even if individual effects on savings and hours worked are small, the sheer numbers of men who now face a life without marriage suggest that the aggregate effect on savings and labour is massive.

Two measures are used to judge if, and by how much, a currency is undervalued: the size of the current account surplus and deviations from purchasing power parity (PPP). What if, though, China's massive current account surplus and sizable deviation from PPP are not currently generated by an artificially undervalued currency, but rather by high savings rates and high labour supply? If that is the case then even a floating exchange rate would not satisfy China's trade partners' thirst for an appreciation.

An increase in savings skews exchange rates by reducing the demand for all goods, both tradable and non-tradable. The price of tradable goods is set on the international market and, as a result, is largely unaffected by this decrease in demand. However, the relative price of non-tradable goods will fall as the result of the decrease in demand causing a decline in the real exchange rate and a deviation away from PPP.

Likewise an increase in labour supply will put downward pressure on real exchange rates if the non-tradable sector is more labour-intensive than the tradable sector. This is because an increase in supply of labour to that sector will increase the volume of output, putting downward pressure on relative prices, again, and by extension exchange rates.

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The authors are not arguing that there is no currency manipulation by the Chinese government. They do find, however, that although PPP suggests that the exchange rate is undervalued by 45 per cent, once the structural effects of the gender imbalance are taken into consideration the undervaluation is only between 2 per cent and 8 per cent.

So the yuan has appreciated by 4 per cent since June, so we are already half-way though the most conservative estimate of under-evaluation caused by currency manipulation. If this estimate is correct, and since the gender imbalance in China is not going away any time soon, players on the international market are going to be very disappointed if they are hoping that an appreciating yuan will be giving them a boost any time soon.

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