Posted on 03/08/2010 5:56:31 AM PST by autumnraine
China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy.
Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a “special” policy to weather the financial crisis.
EDITOR’S CHOICE China hints at addressing trade imbalance - Mar-07Lex: Wen on to a good thing - Mar-08Editorial: China’s migrants need more help - Mar-07Wen warns of recovery risks - Mar-05Consequences of stronger renminbi dawn on US - Feb-23“This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.”
Mr Zhou’s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: “We will not yield to any pressure of any form forcing us to appreciate.” Chinese officials have repeatedly emphasised the need for a stable exchange rate.
However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country’s senior leaders.
(Excerpt) Read more at ft.com ...
Uh oh...
If China severs the peg to the US Dollar, that will be one of the key road blocks to the US moving to a policy of printing it’s way out of it’s debt. Look for inflation to rise if this happens.
If the yaun goes up, less Chinese exports and more American imports
But I think the Yuan collapses. China is a basket case right now (one example - their “stimulus” package is about an order of magnitude higher than ours and run much less efficiently). A free floating currency might crash the yuan.
If the yuan/dollar peg is severed, the yuan will increase in value compared to the dollar.
1. This will instantly devalue the current holdings of dollar-denominated debt that the Chinese are holding, which is one of their largest balance sheet assets.
2. Chinese-made goods will increase in price, which will decrease the demand for their goods. They are an export-driven economy, and a significant decrease in their exports will hurt them far more than it hurts us.
3. A higher-value yuan, however, will be able to command greater purchasing power in dollar-denominated assets that the Chinese need, like foreign oil.
I think the Chinese eventually have to let their currency float, but doubt that they will move to a float in one step. Look for them to try an intermediate step like adjusting the yuan/dollar peg point in order to test the results first.
The peg will stay in place until both are fully accomplished. The US debtor nation will do nothing in the meantime.
I think you're right.
This statement - like most other fiscal & monetary policy statements - requires careful parsing.
1. The dollar peg hasn’t been in place “since 2008” - it has been in place for a lot longer. However, what has been in place since 2008 is a freeze to the gradual & controlled yuan appreciation, a 20% appreciation vs the dollar that started in 2005.
2. It is estimated that if the yuan were to float freely it would have another 20% to rise. A complete removal of any peg would certainly be a shock, but the Chinese have been managing yuan appreciation (the functional equivalent of deliberately lowering the value of thier dollar reserves) for years before the crisis.
3. The Chinese may indeed allow the RMB to increase, but are very unlikely to allow free float. They are fundamentally a mercantilist county - communist in name only. Mercantilist coutries focus on internal social stability and economic growth by promoting exports - in this day & age, undervalued currency is the main economic mechanism for doing that.
The problem I see is an absolute advantage scenario for Chinese goods in the US. The cost of goods imported will rise with no substitute American goods. America can not manufacture bluejeans, America can’t even manufacture ink needed to make the jeans blue. Maybe I’m being a little gloomy about the economics, I do not see any real comparative advantage. We sold our freedom long ago.
The chinese may have finally figured out that since oil is priced in dollars—whatever trade they lose because of a higher yuan —is made up for in reduced costs for oil.
China has another problem: they’re not the only place we can buy cheap stuff. Take a look at a piece of clothing at any store - most of the clothes are made at places all over the world, not just China. China might make a lot of the hard goods like toys and electronics, but not everything gets made in China. If they raise their currency too much, they price their cheap stuff out of the market.
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