Exposing Myths About China and the Yuan

Real Clear Markets ^ | November 17,2009 | John Tamny

[C19fan]

President Obama's arrival in China has predictably generated all manner of commentary about the economic relationship between it and the United States. Not surprisingly, the majority of the commentary has been economically untrue, misguided, or both.

First up is the notion that China artificially keeps the value of the yuan lower than it would naturally be. What this commentary misses is that currencies aren't commodities, rather they are concepts. Nothing else.

In that sense, China is one of many countries that pegs its currency to the dollar in order achieve for it a measure of credibility due to the dollar being the world's currency. Much as trade among the fifty states in the U.S. is made more frequent thanks to there being a common currency, the yuan's stable relationship with the dollar is what has fostered a great deal of trade between individuals in the U.S. and China. Trade is the reason we produce, and currency stability facilitates trade.

[C19fan]

Mr. Tamny goes through the arguments about the benefits of fixed exchange rates. Milton Friedman would vehemently disagree as he believed exchange rates are just any other price and the market should be allowed to set it. China does keep the yuan artifically low that is the reason it has amassed such a huge foreign reserves as it constantly keeps buying dollars to prevent the yuan from appreciating.

[ex-snook]

China is acting that the classical Darwinian capitalist. Survival of the fittest competitor.

[TopQuark]

The article is one wrong argument against the straw man. Here it is: "currencies aren't commodities, rather they are concepts. Nothing else."

This is false prima facie: people don't trade concepts. It is a special commodity that stores and allows for inter-temporal transfers of value. That is why dollar has a price. It is paid by hundreds of thousands of people every minute. One can check it on Yahoo. What more proof does one need that it exists?

What gives the author away is also a statement "it misses the point." It is quite sophomoric to claim that all economists miss the point. If he can argue it successfully, he should publish this "finding" in a peer-review journal. Or at least attempt to write a scholarly article. This one is not.

To hide a general conceptual disagreement about the role of money in an applied article about yuan is also intellectually dishonest.

[bsf2009]

UPDATE 1-China, US eye pact to help troubled banks -sources

[Wuli]

“First up is the notion that China artificially keeps the value of the yuan lower than it would naturally be. What this commentary misses is that currencies aren’t commodities, rather they are concepts. Nothing else.”

“Currency” or “Concept”; “Apple” or “Orange”; it does not matter. What matters, no matter what you call it or how you “produce” it is: what value does it have, to them who have it, to them who want it, to them who are offered it???

While China’s pegging of it’s currency at fixed rates based on the dollar, has been good for “stability” for China and for U.S.-China trade (as long as they don’t let the rate float), it has been achieved at a price China will have to pay sooner or later.

They have sold their goods for cheap, easy-credit, FED-inflated dollars, importing that inflation into the expectations of their domestic economy. Sooner or later they will have to “deflate” to resolve the domestic part of the problem. They can do so voluntarily, using various financial and economic tools, or they will be forced to in some future crisis that will be a result of failure to take the voluntary steps.