Many believe that if China revalues the yuan, with US$2.5 trillion in reserves, it will lose US$25 billion for every 1 per cent appreciation of the currency. One rather excitable English economist at a Shanghai university even claimed that this loss would represent an equivalent profit to the US government.
These views are wrong - the latter almost comically so. In fact, it is difficult to say if China as a whole will benefit or suffer from an appreciation, but it is more likely it will gain rather than lose, because of the resulting improvement in the terms of trade as it gains more imports in exchange for every unit it exports.
To understand why, we must note that by definition an appreciation of the yuan automatically benefits everyone who is effectively 'short' foreign currency, and hurts those who are 'long'. Of course, the People's Bank of China will suffer a large loss if the yuan revalues. After all, to support its foreign-currency reserves, it has an equivalent amount of yuan liabilities, and a revaluation would cause the value of the yuan liabilities to rise relative to the foreign-currency assets.
But the nation overall doesn't lose. The real value of the reserves is not their value in yuan but rather in the sum of 'stuff' that can be bought with those reserves. As a revaluation reduces the yuan value of the reserves, it also reduces the yuan cost of foreign goods. China could buy as much 'stuff' with its reserves after it revalued as it could before.
Will anyone else besides the central bank lose if the yuan is revalued? Yes. In fact, every economic entity in China with a similarly mismatched balance sheet will also lose.
Exporters earn dollars while their costs are largely in yuan, and a revaluation immediately causes them to lose. Chinese companies and individuals who have stockpiled large inventories of commodities will also lose, since the values of those commodities are set in international markets, and a revaluation of the yuan immediately causes the value of those commodities to fall in yuan terms. Wealthy mainlanders who hold large amounts of money offshore will see their money value fall.
With so many losers, there must also be an equivalent amount of winners. The biggest group of winners by far consists of anyone who is a net importer of foreign goods and commodities and, with the exception of subsistence farmers, nearly everyone in China is a net importer.
