Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
China Severs Its Currency's Link to Dollar
#1
I have been waiting for someone here to start a thread on this even, but since noone has, I will.

Much has been said in the last week about China removing it's peg to the Dollar, and while many have done so, perhaps this article in the NY Times, is the best place to start. This is surprising, as the NY Times usually gets everything wrong nowdays.

Quote:China has abandoned one of the world's clearest currency policies, a tightly managed peg of the yuan to the dollar that had endured since 1997. China has chosen instead to adopt one of the world's most opaque currency policies, with a secret mechanism to reset the yuan's value each night.

For nearly eight years, Beijing's leaders trusted in Alan Greenspan, assuming that where the dollar went, China could safely follow. Now China's rulers are putting their trust in a much less well-known central banker: Zhou Xiaochuan, the governor of the People's Bank of China, who must manage the more discretionary policy put in place yesterday. Starting with the Asian financial crisis in 1997 and continuing through the rapid economic expansion since then, China has allowed the yuan to vary less than one-hundredth of a percent from its peg of 8.277 to the dollar. That impressive stability helped prompt business executives and entrepreneurs from around the world to invest $60 billion a year in new factories and other operations in China. These investors were confident that they knew what those businesses and their exports would be worth in dollars.

This is the very same thing that happened in the late 60s, early 70s, when Nixon listened to the Monetarist Milton Friedman and allowed the Dollar to float. It was a collosal failure and led to the most horrendous inflationary period in US history.

Here is what Larry Kudlow has to say about the switch on his website,Yuan Manipulation Wrong Course

Quote:The Chinese Communists partially capitulated to U.S. Congressional China-bashing protectionists and to U.S. Treasury monetarists in search of an impossible quick fix that somehow would narrow the bilateral Sino-American trade gap and provide more jobs for American manufacturers.

It is a poor deal, replete with bad thinking that very well could damage the economies of both nations. The People’s Bank of China announced a small currency revaluation whereby the yuan would rise to 8.11 dollars from 8.28 dollars. Henceforth, the daily trading price of the yuan against the U.S. dollar will now float within a trading band of plus or minus 0.3 percent.

And here is what he stated in National Review yesterday, Currency Basket Cases

Quote:I am still, however, bewildered at the Treasury Department’s great faith in the merits of floating exchange rates. Does anyone, for example, truly believe that the dollar-euro relationship has been a healthy one? In dollar terms, the euro was first offered at about $1.17. It then dropped as low as 80 cents, shot up as high as almost $1.40, and is now around $1.21. Talk about rollercoasters.

The failure of the G-7 economic powers to generate greater currency stability is a glaring omission. Currency stability is a key building block of economic growth, while radical fluctuations of major currencies have been a detriment to growth. Just look at the stagnant economies of Japan and Western Europe. This subject is swept under the rug time and again at major economic summits, favoring economic failure rather than success.

Free markets function best when the basic monetary unit of account is steady and predictable. While others cry “currency manipulation,” I counter that China’s stability relative to the dollar is a success story. More, the interactions of the dollar, euro, and yen have been manipulated on a grand scale. Yet we only bash China.

Global currency reform to promote monetary stability and maximize economic growth has been completely ignored by Europe, Japan, and the U.S. Instead of blaming China, the major powers should take a hard look at their own failures.

I agree with him on this. The problem here is politics and economic ignorance on behalf of certain politicians, such as " senators Smoot Schumer and Hawley Graham", as he puts it. It is going to no only hurt China in the long run, but our trading life as well. The one thing that business loves more than anything else is "Stability". With floating curriencies, stability is problematic to say the very least.

Comments?
___________________________________________________________________________________________________
All men are frauds. The only difference between them is that some admit it. I myself deny it.
H. L. Mencken
Reply
#2
J,

Stratfor says this is not delinking,it is only a revaluation to temporarily hold off US demands for change or else.
Reply
#3
Palladin Wrote:J,

Stratfor says this is not delinking,it is only a revaluation to temporarily hold off US demands for change or else.

Since when have the Chinese bowed to US pressure in the past? Granted it is only a bit over 2%, but it is still a delinking nonetheless. It is foolish and potentially bad. And too, what will a revaluation accomplish here?
___________________________________________________________________________________________________
All men are frauds. The only difference between them is that some admit it. I myself deny it.
H. L. Mencken
Reply
#4
Quote:And too, what will a revaluation accomplish here?

1. Answers the US pressure for a moment.

2. Gives the Chinese some flexibility. If the dollar continues to climb, the Chinese may want to move yuan in the OTHER direction.
Government is necessary because people left unchecked will do evil.

The government is composed of people left unchecked


Reply
#5
The good articles just keep on coming in on the subject. In Watch out, chavs: China's prices are rising, several points are clear, other than the intellectual flatulence of Senator Chucky Schumer.

Quote:The reason for this is pretty simple. By pegging the yuan to the weak dollar, the Chinese authorities have caused a massive misallocation of capital. Foreigners have poured fixed investment into the country. And the locals have responded by opening up factories of their own. The result is oversupply in sectors such as electronic goods and textiles. The situation has been made worse by Chinese banks, which are all state-run, and which offer cheap loans to well-connected local entrepreneurs. Many small Chinese companies are struggling to pay their debts. Although the official debt to GDP ratio is just 25 per cent, if you add in bad debts hidden in the banking system, it is nearer 65 per cent. For every British chav, there are several Chinese workers employed by a businessman whose cousin is close to some local Communist bigwig, hoping that the bailiffs do not come knocking

Even he sees the problem with the asian familial system and the vulnerability of their banking institutions.

Quote:There is another problem, too. Thanks to the one-child policy, China now has the mother of all pension deficits. State-owned companies keep suggesting they are going to privatise, or sell shares, in order to plug their pension deficits. The prospect generally sends the stock market plunging further. Add in the pension deficits and the potential obligations on the Chinese state are about 160 per cent of GDP, among the highest on any government in the world.

On top of that, most of these single males will be located in the urban areas and thus better educated. Expect many to leave the country, in search of a mate, thus bleeding China further of it's intellectual and monetary base.

Rough times ahead. India looks better with each day.
___________________________________________________________________________________________________
All men are frauds. The only difference between them is that some admit it. I myself deny it.
H. L. Mencken
Reply
#6
Quote:Expect many to leave the country, in search of a mate, thus bleeding China further of it's intellectual and monetary base.

Are you kidding? China can afford exporting 100 mil single males....but who will be the importer?
Government is necessary because people left unchecked will do evil.

The government is composed of people left unchecked


Reply
#7
mv Wrote:
Quote:Expect many to leave the country, in search of a mate, thus bleeding China further of it's intellectual and monetary base.

Are you kidding? China can afford exporting 100 mil single males....but who will be the importer?

Of course I am not kidding. I would imagine that they will go almost anywhere. looking for a bride. But the drain of young, educated males who leave the system will hurt it in ways that it never intended. And since the most important natural resourse are a county's people, this will still be a negative to the PRC.
___________________________________________________________________________________________________
All men are frauds. The only difference between them is that some admit it. I myself deny it.
H. L. Mencken
Reply
#8
Perhaps they will order some of those Russian brides out of one of those catalogs. It will lead to a new Sino-Russo Pact. Shock
"Most people just want tomorrow to look pretty much like today." - Terry Pratchett
Reply
#9
Here is what Robert Samuelson has to say about China's Devalued Concessions.

Quote:Let's be clear. The central problem of the exploding trade imbalances between China and the United States -- and China and the rest of the world -- is not the exchange rate. It is the addiction of China, following the pattern set by Japan and other Asian countries, to export-led economic growth. As long as this export dependency continues, Asian countries will pursue undervalued currencies, because a cheap currency aids exports and punishes imports. China's decision last week to revalue the yuan by 2.1 percent doesn't change that.

What I really like about Samuelson, other than being a savey Keynesian, is the accuracy with which he uses words. Note that he NEVER uses the term "trade defecit". He is too knowledgable for that. He rightly uses "trade imballance", and this is significant.

What is also significant is that he links China's MO to that of Japan and other asian countries in thier quest of exports, instead of also concentrating on consumption for it's citizens. Eventually, this must change, because having a great deal of money is nice, but not if one is unable to purchase wonderful things with it. And if the cost of those things is particularily high, customere tend to buy less of them. Also, the asian model of business eventually leads to a hard fall, as with Japan.

China should pay close attention to this one.
___________________________________________________________________________________________________
All men are frauds. The only difference between them is that some admit it. I myself deny it.
H. L. Mencken
Reply
#10
Now, here is a truely wise man. Everyone should read this one and bookmark the article, not only for a rebuttal, but also as an "I told you so" moment.

Quote:The U.S. media fed the frenzy. Stories described how tiny plots of land in Tokyo''s fashionable Ginza shopping district were worth more than much of Manhattan. Magazine covers proclaimed the Japanese takeover of Hollywood. Bookstores were lined with tomes claiming to explain the secrets of Japanese business management.

Meanwhile, the United States was sliding into growing self-doubt, and recession. The auto industry was declared dead. Electronics was right behind it. As trade deficits climbed, Americans' anger mounted. Politicians and union leaders raised sledgehammers and smashed Japanese cars and televisions on Capitol Hill.

Is this like old times, or what? Here we have Five Senators Crying, Four Kooks a moaning, Three readers stammering, two Palladins rambling, and A Partdirge In a Pear Tree. S6
___________________________________________________________________________________________________
All men are frauds. The only difference between them is that some admit it. I myself deny it.
H. L. Mencken
Reply
#11
Good article and I recall the frenzy vividly. I was about to enter college at the time and everyone around me admonished me to learn the Japanese language and culture. Two normally very prescient authors addressed it in a couple of early 90s books (Creighton's Rising Sun, and Clancy's Debt of Honor).

There was some fire in all that smoke. The Japanese business model was very nationalistic and they did have a great aspirational goal to "defeat" the US on the business field. I also recall a couple of Japanese companies (Toshiba and NEC) selling very sophisticated electronics to the Soviets for use on their submarines.

But mostly it was all empty rhetoric as it turns out. I'll admit, I bought it. I was young, dumb and full of... zest. S6 It was also a time before the internet as we know it today and there just wasn't the same proliferation of information as we have now.

I did disagree with one comment in the article outright though:
Quote:Today Japan is experiencing a modest comeback, but it is unlikely to ever again challenge U.S. dominance. Instead, China has taken its place in the American psyche.

I think that Japan has positioned herself to begin growing again at a rapid pace. The nation is like an old prize fighter who has finally stopped feeling sorry for itself and gotten lean and mean again. I think it will benefit us as well. They won't be looking at the US as a rival but a big partner against a growing Chinese dragon. I expect they are looking warily at India as well given the latter penchant for hi tech growth.
"Most people just want tomorrow to look pretty much like today." - Terry Pratchett
Reply


Possibly Related Threads…
Thread Author Replies Views Last Post
  Hugo severs U.S. diplomatic ties mr_yak 98 23,429 09-21-2008, 08:03 PM
Last Post: jt
  China, Trade, and Currency Revaluation. John L 21 8,265 07-12-2005, 06:53 PM
Last Post: SNK

Forum Jump:


Users browsing this thread: 1 Guest(s)