McEconomics hails the yuan

The Economist - By Andrew Clark

City News; Friday 11 April 1997

THE Chinese economy received a public relations boost from an unlikely source yesterday, when a study of Big Mac prices suggested that the yuan was the world's most undervalued currency.

According to this year's Big Mac index, published today by The Economist, burgers in Beijing are the cheapest in the world when the local price is converted into dollars. The yuan, it argues, is therefore due for a sharp rise. Ronald McDonald's taste for the yuan received a cautious welcome from economists. Gerard Lyons, chief economist at DKB International, said: "The yuan is definitely on the up. China has a very fast growing economy."

He said the burger index had "some sense in it" but added: "You should use it with other factors such as in-depth economic analysis." Other hot tips from the burger world include the Russian rouble and the Hong Kong dollar, which the index suggests are due for an upturn, delivering a good omen for political stability.

The survey offers a poor prognosis for Switzerland, however, where the locals have to stump up $4.02 for a Big Mac - enough to cover a further side order of fries and a soft drink in America. The Swiss, it suggests, are setting themselves up for a fall. Britain comes off a little better. The going rate for a Big Mac in Britain is 1.81, 22pc above the price in America. But Britons pay a similar amount to the Germans, suggesting relative exchange rate stability in preparation for a possible single currency.

Perhaps surprisingly, McDonald's played down the index. A spokesman said McDonald's did not advise investors to rush out and buy the yuan. Other experts objected to the theory behind the index, which suggests that currencies will move towards a level which equalises the price of identical goods in each country.

Analyst Brian Marber said this idea was outdated: "It's a busted flush - that was given up years ago." He said currencies were affected more by speculation than by any underlying factors.

Mr Marber said: "I am aware of the Big Mac index and the Mars Bar index and the lunch-at-the-Savoy index but I wouldn't pay any attention to them at all."

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