The China Situation
In a world where everyone wants to be an exporter, he who has the weakest currency is king.
And nobody knows this more than China.
I came across this article from seeking alpha about the worsening trade situation between China and the states.
“The Chinese government, in an effort to maximize exports and minimize US imports prints their Yuan to buy dollars. This prevents their currency from rising and the dollar from falling. Then it loans those same dollars back to America by buying US debt.At the same time, China:
• Puts in place purchasing restrictions
• Permits piracy
• Delays legitimate items from entering the country
• Provides massive direct subsidization of export production in many key industries
• Maintains strict non-tariff barriers to importsIn 2009 U.S. imports from China were worth $296.4 billion. U.S. exports to China equaled $69.5 billion. In the first half of 2010 the U.S. trade gap with China equaled $119.5 billion.”
This practice has obviously pissed off a lot of people and the US, Japan, the emerging markets as well the EU have all voiced out about this for years- Yet no real effort has been made to fix it. Which made me think; does China really have the world by the balls?
Geithner’s strongest word so far has been “Concerned”- and this was after Chinese think tanks brought up their so called “nuclear option” if the US goes on with trade sanctions.
“Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over $1.5 trillion (£963bn). This would trigger a rise in US interest rates. His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar.Mr. Ding reflects thinking among some in the Poltiburo, who seem convinced that the US is in decline and that China's rise as an exporter of goods and capital give it the upper hand.”
I call shenanigans; first of all who will they dump them to? If they do so, a stronger Yuan would make imports cheaper, bolster exports, and might help curtail inflation.
Gabriel Stern at Lombard Street Research described the implicit threat to sell Treasuries as "empty bluster" because Beijing's purchase of these bonds is a side-effect of its Yuan policy.
"Bring it on: it will weaken the dollar, which is what the US wants. The interest rate effect can be countered by the Fed."
I’m sure I’m missing a few things here, but the way I see it, taking on the Yuan might actually be a good thing, and more than a few solutions have been brought up for it . But by the way everyone’s tip-toeing around the issue I doubt something will be done about it, and China might have the last laugh.
What do you think?
China and other emerging countries are very important in the world economy going forward, otherwise the US government would've acted on the currency issue. Majority of US GDP is consumption and some of the major corporations are in the front lines of importing Chinese goods (i.e. WMT). I doubt US can do anything about this situation without hurting the retail industry, and its customers.
This is not that new of an issue,
Labor/unions have been pushing the treasury to label China as a currency manipulator for a while now, but political reality prevails
A stronger Yuan is just going to hurt Chinese exports even more; there are hundred of thousands of factories already closed down due to the economic downturn and the rise of the Yuan. The ones that survived are the big ones that are all burning cash the last few years. Chinese manufacturers that are making money are mostly the ones that are producing products for the Chinese customers within; necessities producers.
Of course if US actually has good products to export to China, the Chinese doesn't mind spending their money on imports. However, what goods do US produce that any normal Chinese consumers will buy? or can afford?
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If US can offer more attracting commodities (high tech for example), then surely China is willing to pay more. And being a great exporter is not solely dependent on the weakest currency (consider many Africa countries), a labour force equipped with some level of education and discipline is more crucial IMO. Theoretically US and other developed countries can move all of their factories out from China, but practically you have to wait for 1) another country or a group of countries that have a labour force of equal quality 2) time and capital to pull out and settle down. Of course lots of coporations are already doing this, but it takes time. And time, my friend, is just what China needs.
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