TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Jonathan Fenby comments on China’s currency policy:

It has to bring the economy back from the runaway 12% growth reported early this year to a sustainable level of around 8% which would create sufficient jobs, keep the population happy and underpin the Communist party’s claim to be the only force that can ensure material progress. It needs to rein-in industries whose excess output adds to the perennial problem of over-capacity, but without creating mass unemployment. It needs to guard against inflation and boost wages.

China’s economy is still heavily dependent on exports. Their incredible economic growth, and thus employment for the population, is driven by it. Allowing the Yuan to appreciate as much as U.S. critics desire would severely harm their export sector, so it isn’t an option.

China does need to become a more self-dependent economy, which entails building a larger and sustained middle class (so consumer goods can be a larger part of the economy) and moving up the supply chain into a product design role.

There still is, though, a huge portion of the population just looking for a steady job of any sort. While the east of China is well developed and in some parts feels very much like a developed country, the west of China is also very much a developing country. The incredible amount of migrant workers in China’s eastern cities bear this out. The CCP knows China’s history well, so it knows that the largest threat to its power is poor economic conditions. They want to continue developing the west and secure the east’s affluence so their power isn’t threatened.

Allowing the Yuan to significantly appreciate against the dollar would threaten this. China’s move away from manufacturing must happen, but the CCP wants to develop the economy in a controlled manner to prevent significant social shocks.