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Fri 22 Jul, 2005 12:32 pm
I heard something about China's currency (Yuan currency) becoming stronger against the U.S' currency? Why is this?
I saw briefly on the news they used a word to describe the situation of China's currency and U.S. does anybody know what this word might be? And what does it mean in relations of their currency? I thought it meant that they "broke ties" with each other.
good evening. If no one else posts, I will try to respond tonight or tomorrow.
But it is a bit complicated, I don't want to start, wong, unless I know that you or someone else is still interested.
Yes, I am interested. All I know was that I heard it on the News and have been curious about it ever since. I was curious to the point where I had to start this new thread, thank you.
Hmmm... I know I'm talking to myself here because I've waited for a response for the last few days and haven't gotten any. Anyways I've looked up an article and I can only make an understanding that China agreed to adjust it's currency from 8.27 to 8.11 against the U.S. dollar which makes them stronger. What I don't understand though is how does this have a positive impact amongst Americans? Is it because it's better for them in the Industrialized world? Please let me know if I'm on the right track or not, thanks.
Wong. I apologize for not responding earlier. I am going to number these paragraphs so that you or anyone else can correct me if I am wrong about something. It's a pretty complicated subject; I may spread it out over a couple of posts.
(1) For the last decade or so China has had what is called a "fixed" exhange rate versus (vs) the dollar: 8.27 yuan = 1 dollar. No matter what, that was the exchange rate.
(2) Most developed countries allow the exchange to vary day to day or even minute to minute, for a variety of reasons ranging from economic to political. An example of a political reason might be, for example, a terror attack in, say, Euope, which might cause nervous investors to seek to convert their euros into dollars. Dollars might be viewed as a "safe haven" vs having their money tied up in euros. All of those folks seeking to buy dollars would cause the value of the dollar to rise. The ability of exchange rates to fluctuate is called "floating."
(3) China didn't allow it's currency to "float." Instead they established the "fixed" relationship. This has a lot of ramifications.
(4) In the last decade, Chinese manufacturers have been able to increase both the quantity and quality of their products and they have found an American public eager to buy those goods because they are perceived as being just as good as American made goods and they are cheaper than American made goods.
(5) Why are they cheaper? The argument is made that the cost of labor (wages) is lower in China. How much does the average factory worker in a Chinese textile factory make vs his/her counterpart in the US? The counter-arguement is that US productivity is much higher, so the amount of labor involved in making a shirt, for example, is lower because of the sophisticated machines used here. I am setting aside that issue for the moment.
(6) In any event, the Chinese are selling a lot of products into the US market. A lot. They are selling us a lot more than we are selling them, resulting in a huge "trade deficit" for the US and a huge "trade surplus" for China. Shiploads of goods are heading from China to the US and those ships are going back full of US dollars (Okay, that is figurative, but it is a good image).
With me so far, Wong? I'll pick up with (7) in a bit. I hope this is helping.
-johnboy
Yes, it is thank you. Now this means the Americans and Europeans must be glad that China has finally allowed the Yaun to float. I'm not sure what made them change their minds because it seems as though when it was "fixed" or "pegged" China was greatly profitting from Americans when selling goods to them. Let me know more about it, greatly appreciate it.
Good, wong. I am glad you appreciate this little discourse. I wonder if anyone else is reading this. I had a bit of a scare with my first post. It seemed to disappear without being sent. But I was able to retrieve it.
(7) When the trade imbalance between two countries with a "floating" exchange rate persists, the relationship will adjust to correct the imbalance. The goods of the country with the "trade surplus" will become more expensive, potentially reducing its exports. The goods of the country with the "trade deficit" will become cheaper, potential increasing its exports.
(8) But the Chinese had this "fixed" rate so the situation is not self- correcting. Instead, the deficits being piled up by the Americans and the surpluses piled up for the Chinese increase.
(9) Your comment, wong, about this being a great deal for the Chinese is correct. You undoubtedly know more about Chinese society and culture than I do. But I would conjecture that the government realizes that things are changing. You have things like internet and cell phones and McDonald's and subsistance farmers who are tired of merely eking out a survival. The government is under a lot of pressure to create jobs. If they fail to do so, there could be social (political?) instability. Keeping the exchange rate "fixed" helps to potentially diffuse that tension. I can't, again, pretend to know much about about everyday Chinese culture, but I think I am right about that analysis.
(10) The West recognized that instability in China could have dreadful ramifications for everyone (from Taiwan to Japan to Russia and even to the US) and so the West tolerated the trade deficits we were racking up, largely due to the "fixed" exchange rate. But the situation is no longer tolerable.
More in a bit.
Moving along at a rapid clip:
(11) The "fixed" relationship between the yuan and the dollar has created categories of "Winners" and "Losers." Here are some of each:
---China is a "Winner" for the reasons I mentioned above
---But are the Chinese people "Winners" or "Losers?" Are those boatloads of money being wisely spent on increasing wages, building infrastructure (roads, schools, healthcare, etc) or is that money being squandered on expensive cars etc for government officials. I don't know.
---The American consumer and retailers like Wal-Mart are "Winners" because we get access to relatively cheap goods from China.
---The big "Losers" are the American manufacturers and their employees who can't compete, because of the "fixed" exchange rate, on a level playing field. Are you familiar with that term? We are playing in a game in which we have to run up hill all day, while the other team gets to run downhill all day. In the last five (I believe I heard five) years, the US has lost 3.3 million manufacturing jobs. Some industries, like textiles, have been virtually wiped out. Not all attributable to China, of course, but the perception is that China had a lot to do with it. This has created a lot of pressure on our government, from business and from labor, to get the Chinese to do something about the exchange rate.
(12) Oddly, there is another "Winner" here which doesn't get too much attention. And that is the American public at large. Remember I mentioned the boatloads of dollars that end up in China? In addition to the US running up a "Trade Deficit" with China (buying more stuff than we are selling), the US has a substantial "Budget Deficit." We are spending, every year, more money than we are taking in through taxes etc. We make up the shortfall by borrowing money from individuals, countries and others by issuing government bonds. The Chinese are lending us a lot of money to fund our continuing "Budget Deficits" with the surplus dollars they have. If that souce of borrowing were to dry up, we would have borrow elsewhere, certainly at a higher cost. Those higher costs ("Interest Rates") would ripple through our entire economy, causing mortgage rates to rise, automobile interest rates to rise, and interest on our beloved credit cards to rise.
I promise to stop after one more group of paragraphs. Promise.
johnboy
realjohnboy wrote:Moving along at a rapid clip:
(11) The "fixed" relationship between the yuan and the dollar has created categories of "Winners" and "Losers." Here are some of each:
---China is a "Winner" for the reasons I mentioned above
---But are the Chinese people "Winners" or "Losers?" Are those boatloads of money being wisely spent on increasing wages, building infrastructure (roads, schools, healthcare, etc) or is that money being squandered on expensive cars etc for government officials. I don't know.
---The American consumer and retailers like Wal-Mart are "Winners" because we get access to relatively cheap goods from China.
---The big "Losers" are the American manufacturers and their employees who can't compete, because of the "fixed" exchange rate, on a level playing field. Are you familiar with that term? We are playing in a game in which we have to run up hill all day, while the other team gets to run downhill all day. In the last five (I believe I heard five) years, the US has lost 3.3 million manufacturing jobs. Some industries, like textiles, have been virtually wiped out. Not all attributable to China, of course, but the perception is that China had a lot to do with it. This has created a lot of pressure on our government, from business and from labor, to get the Chinese to do something about the exchange rate.
(12) Oddly, there is another "Winner" here which doesn't get too much attention. And that is the American public at large. Remember I mentioned the boatloads of dollars that end up in China? In addition to the US running up a "Trade Deficit" with China (buying more stuff than we are selling), the US has a substantial "Budget Deficit." We are spending, every year, more money than we are taking in through taxes etc. We make up the shortfall by borrowing money from individuals, countries and others by issuing government bonds. The Chinese are lending us a lot of money to fund our continuing "Budget Deficits" with the surplus dollars they have. If that souce of borrowing were to dry up, we would have borrow elsewhere, certainly at a higher cost. Those higher costs ("Interest Rates") would ripple through our entire economy, causing mortgage rates to rise, automobile interest rates to rise, and interest on our beloved credit cards to rise.
I promise to stop after one more group of paragraphs. Promise.
johnboy
That is xcllent introcution to IPE, in terms of FX rate.
I think I can wrap this up in one more session:
(13) So, in the US, there are "Winners" and "Losers." But clearly, the latter hold sway right now. The "Fixed" exchange rate cannot be allowed to continue. Politically, we keep a wary eye on China. It is a potentially a major stabilizing force in the region (vis a vis North Korea, for example) but then there is the Taiwan issue and also a concern about whether the government can keep up with rising expectations. I, again, can't speak cogently about all of that.
(14) So the "Trade Deficit" was forced to be addressed. Here is what happened. If China didn't do something, the US would. Any goods coming into the US from China would be subject to a "Tariff." A tax in another word. The money collected would go to the US government. I am over simplifying the mechanisms for this, but you will, I hope catch the effect. Goods from China would rise in price, virtually over night, and the US government would keep the tax.
(15) So the Chinese agreed to a token lifting of the "fixed" exchange rate, allowing the yuan to increase in value by less than 3% with, perhaps, more adjustments to come. The move was met with a high degree of dirision amongst many economists and politicians in the US who feel that the yuan may be undervalued by, not 2.7%, more like 40%.
My own feeling is that this is a situation that needs to be rectified and should probably have been addressed before. But, for various other reasons. wasn't. 2.7% isn't much, but it is a step in the right direction. Both the US and China need to keep moving forward on this.
So that is all I can offer on this topic, wong Thank you for asking the question and welcome to A2K. I enjoyed the stimulation of trying to remember what I learned in my undergraduate economics classes in college and trying to explain it in today's much more complex world
-rjb-
And thank you coolion for lettling me know that there may be others out there reading this. I think wong and I were feeling that we were the only ones here, and that still may be close to the truth.
Welcome to A2K. Are you into economics and the various issues at play here? I actually majored in something a bit different when I was in college 40 years ago, but I took a number of econ courses because I found the subject quite fascinating.
Anyway, good to hear from you. Any comments you might wish to add would be appreciated. I have tried to answer wong's question as best I could without passing too much judgement as to who is right and who is wrong, if, indeed, there are rights and wrongs. -johnboy-
Thank you Johnnyboy for all the info and thanks for the welcoming. I greatly appreciate what you did and for you to take the time to write up/answer my question. I wanted to post this to let you know that I indeed found this to be a good read and don't see anything wrong with it. I've read some sentences a couple of times over again to clarify myself other than that it seems you've done a good job and now I have a better idea of their relations and why the Yaun was "floated", thanks again.
Actually I just learned a bit about it, your explanation and memory seem to be unbeatable.
Later I will bring some questions which bother me a lot recently, I hope you can help with them.
But before that, I got one more question.
As politicians or economists argued, CNY is undervalued by 40%. (I don't know how to get this, but I believe, for me, it's too complicated to figure out) However, 40% is too large a scale for CNY to appreciate--or it depends on the time scale. Many points lead to a conclusion that CNY will continuously appreciate against USD, to what extend do you think it will stop?
coolion wrote:Actually I just learned a bit about it, your explanation and memory seem to be unbeatable.
Later I will bring some questions which bother me a lot recently, I hope you can help with them.
But before that, I got one more question.
As politicians or economists argued, CNY is undervalued by 40%. (I don't know how to get this, but I believe, for me, it's too complicated to figure out) However, 40% is too large a scale for CNY to appreciate--or it depends on the time scale. Many points lead to a conclusion that CNY will continuously appreciate against USD, to what extend do you think it will stop?
Yeah I read that too about the 40% value thing. It's HUGE, yeah how is that even possible? Ah, man Coolion that's a good point there not sure if I want to bother him with this question though. I'll leave it up to him to answer it or not take your time.
Hello again, wong and coolion. Johnboy tries to be meticulous in his being able to document what he cites as being a source for a comment I make. I know, from the newspapers that I read and the radio that I listen to, that these sources are generally respected.
But I panicked a bit when yall questioned the 40%. I had no reference for that assertion (which I hope I made clear was johnboy's reporting of what some economists and politicians were claiming and not necessarily my opinion).
Google to the rescue. Please google this: Chinese yuan undervalued by 40%
There appear to be nine articles that address this notion. I haven't waded through them to see what their arguments are or how credible they might be. I am just relieved that I can show you that the 40% was not something I made up. Let me know whether or not the articles help you. -rjb-
Cool, thanks I think I'm good though. I'm satisfied with my initial question being answered. After that I guess the rest just becomes a bit too complicated for me.
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