Dollar/Yuan Peg Means China Gains on All Fronts

The Chinese are publicly questioning the cheap dollar and expressing concern for the U.S. budget deficit. This is all talk aimed at the Europeans. It does not upset the Chinese. They tie their currency, the yuan, to the U.S. dollar. As the dollar becomes cheaper, their exports gain advantage against every other major currency. They are crying in their beer.

The U.S. has pressured China to let their currency float, which would take away their competitive advantage in exports to the U.S. They will not do it. There was a small adjustment in 2008, but since the credit crisis began, the currencies have moved in lockstep.

China gains on all fronts. They have a built in advantage against the dollar, and as the dollar drops, they gain an advantage against other major currencies. This will help bring their economy out of the current recession. Sometime down the road, once the recovery is underway, they will adjust the value of their currency. But, only a small amount. They will never let it float, with the value determined by traders. Free markets are not predictable enough for the Chinese.

Author's Disclosure: No Positions

Comments

[rlirph]

If free trade is beneficial to our country why are we running trade deficits for most of the past forty years? Haven't we learned from the past forty years trading with Asian countries? What economic benefits do you get from them? Are the benefits worth putting our fellow Americans on the street?

What we need is controlled trade, a practice done well by Japan and China. Do what other people do to you. It is time for us to close our doors to the Chinese products...

This is not an anti-Chinese comment as I am Chinese. I just like to play on a level field.

A US Expat Living in Guangzhou...

2009 Nov 20 04:10 AM

[Dave Wrixon]

Sad, very sad.

2009 Nov 20 04:38 AM

[James Lewis]

rubbish article, try harder.
better still look at my comments of the unfloding of China as I see it day-day,

2009 Nov 20 06:34 AM

[Asbytec]

I wonder if this is what Nixon had in mind when he opened China. Ever wonder how the Asian powerhouse can maintain 9% growth and lock in commodity purchases during a global recession? They don't play fair, wage arguments aside.

We need to pressure them harder to let their currency float and stop selling them our debt. A tariff on tire imports was intended, in my view, as a warning shot across the bow. It certainly isn't going to solve the problem.

Yes, I said it. We need to put an end to our huge trade deficits and stop selling more debt to a major debtor. Most of this is our fault, however. We loved exporting our inflation to China. We loved buying their goods, it saved Joe Sixpack some money. We just don't seem to care about being in debt to anyone and everyone, including command economy with a "free trade" interface.

China is developed enough to play with the big boys. So, let them.

2009 Nov 20 10:17 AM

[user396040]

Their currency is so undervalued that China now prohibits exports of certain raw materials because the price is so cheap due to the undervalued Yuan. This is apparently leading to a protest before the WTO. It is eerily similar to a situation which occurred in the US in the 19th century when Northern textile manufacturers wanted to prohibit the export of Southern cotton.

2009 Nov 20 03:13 PM

[Tony Petroski]

From the article:

"The U.S. has pressured China to let their currency float..."

Evidence? Source?

Mr. Lewis. A fellow American deserves some credit, although you make a good point.

2009 Nov 20 03:24 PM

[Pratul Birla]

It is pathetic. China is making US do all that is against the values of the American society. Recognition of Tibet as Chinese territory, silently reconciling to the human rights abuse in China, accepting the controlled trade in China foreign trade .
Is the leadership in the US so scared of the Maoists ? I am sure they dont lack the brains to understand what all this is leading to .

2009 Nov 20 11:48 PM

[joe1980]

Wow. You people are so ignorant. "We need to put an end to our huge trade deficits and stop selling more debt to a major debtor." By lending so much money to the US, China is a major creditor, not a debtor.

When you need a lot of money, for example, for the bailout that just happened or for the new healthcare bill, you don't really have a choice whom to borrow from. You can't just say "alright, stop selling treasury bonds to China". That's the same as saying, ok, let's not borrow from China. There is no other big money lender out there. Things aren't as easy as you think, so learn some economics before you spew out nonsense.

Two, China's currency being cheap relative to the USD means ordinary Americans get a bargain at Walmart and just about everything else. Most of America is middle-class or below, and they don't want to see a computer costing $2000 instead of $1000, get it? If Chinese yuan's value doubles against the dollar, everything made in China will cost twice as much.

At that point, manufacturers will move out of China, and into another low-wage country, such as India or whatever. Then there will be a huge trade deficit with India. Someone's gotta be doing the low-wage grunt work out there for America so that Americans can have a better life. Just like how people like to complain about immigrant workers from Mexico, you don't realize your office wouldn't be clean or your orange juice won't be on the shelves without them.

God, stop being so ignorant.

2009 Nov 28 11:52 AM