China Currency Stance
This might be a silly question, but if China is pegging its currency and the U.S isn't happy about it, why can't the U.S. just print a bunch of dollars and buy renminbi. Eventually, the Chinese will be forced to allow their currency to appreciate or the U.S. will make economic profit from printing dollars that our worth less and exchanging them for renminbi that are worth more.
Obviously this ignores morality/legality/politics etc. but China doesn't always play nice on those fronts anyway.
If China's response was to just print rmb, that would increase the money supply of both currencies...the U.S. would be holding excess rmb and the Chiense would be holding excess dollars.
Except, the U.S. has a much stronger demand for Chinese exports than the other way around so we would be able to pay for those imports with the rmb...China could obviously do the same but more slowly. Also, once the rmb is back in China, it would stimulate inflation quickly because they aren't in the credit crunch we are in so their velocity of money is higher. If the dollars were returned to the U.S., it wouldn't immediately create inflation because money is circulating slowly.
Inflation would be good for us, anyway, and would create problems for China...
No? This would take some kind of medium between the fed and U.S corporations to get the newly minted money turned to rmb to corporations and then used to pay for imports.
and china is notorious for not playing nice whereas the us already has an international standing and won't compromise it to an extend that china will be able to use it against them.
not to mention, china's got the upper hand internationally
it's because Chinese currency value is not determined by supply and demand, rather its set by the government. Also the value of the Yuan is derived from its reserves, where majority is dollar denominated and if the US buys Yuan its like buying treasuries in the secondary market.
this might sound stupid..how do you buy RMB in the open market? Isnt it controlled?
2 reasons:
1) china has capital controls and effectively chooses what its FX rate should be. 2) even if you were able to openly buy RMB, the local market is wholly undeveloped and there are simply not enough quality RMB-denominated assets worth purchasing.
There is also the issue of the Fed (or whoever would execute this policy) not being able to purchase any safe assets denominated in RMB, whereas China can buy as many treasuries as their hearts desire. Central banks ultimately run out of ammunition when they cannot generate positive carry (for instance South Africa).
However, we are going down this path, just in a different form. Instead of hiking the value of the RMB by buying it up, we are blasting China with a massive blast of inflation once QEII beings. Despite their capital controls, hot money will find its way into China and fuel inflation. There could also be significant runups in the prices of key commodities, which would obviously drive up prices in China as well. The "official" rate of inflation in China is closing in on 4% and things can get ugly very quickly. The PBOC's rate hike the other day was in anticipation of this, despite them printing less than spectacular GDP numbers (relatively of course).
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