This is a very interesting development, I think the Chinese RMB is going to be watched much more closely now that it's free floating instead of being pegged to the US dollar.
I wonder what kind of effect this will have on prices for basic things that I am currently buying everyday.
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posted
Heh, likelihood of it being a full float is low. I suspect they'll just target a small range of exchange rates instead of a fixed target.
Interesting move, politically. They've just bought a lot of goodwill for something that, despite the rhetoric this administration has been throwing at them, won't really matter very much. The last time China let their exchange rate adjust significantly it didn't have nearly as much impact, after all.
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posted
IIRC, they're just going back to the trading band float that was in place before the credit crisis in the United States when they re-pegged it. So effectively, it can appreciate 2% or 3% a year kinda thing.
As for prices we pay, I suspect that it won't matter all that much.
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quote:China has effectively pegged the yuan to the US dollar for the last two years.
In 2005, it briefly allowed a controlled appreciation of the currency, but ended that policy when the global economic crisis threatened demand for its goods abroad.
The yuan has stayed at around $0.147 since then, and would be expected to rise higher given a totally free exchange rate.
Analysts expect the yuan to appreciate slowly - by around 0.2% a month - in line with a recovery in demand from Europe.
posted
Dan Drezner's take on "floating" the yuan. He points out that there were actually two announcements, one in both Chinese and English and one, slightly later, only in Chinese. According to Drezner the second announcement hedged much of what was put forth in the first announcement.
Money quote:
quote:China's aim is to do just enough to placate the G-20 without enraging its domestic producers and online nationalists. By switching to a basket -- one in which the euro seems headed downward -- China has greater flexibility to do whatever the hell it wants with respect to the exchange rate.
I think it's odd that the US has been leading the exchange rate fight. It seems like other economies (particularly the EU) are the ones really losing out when the yuan is held artificially low. It amounts to a global tariff on all goods not produced in China.
Also, here's a pre-announcement post from Drezner from a few days ago about how China is pissing off the world. I was going to post it here to see if Blayne would go apoplectic, but resisted at the time.
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Blayne Bradley
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posted
I do hope some of you people understand that this is the exact same thing Japan did right for about 60 years? Also keeping your currency worth low has its own disadvantages associated with it (such as making imports expensive and forcing hard currency to leave the country) and this is a pretty much natural and no-brainer step for any developing country, like choosing Conjuration specialization for Wizards in D&D.
Its the kind of thing developing countries (like Japan) will wean themselves off of once they've reached a higher level of development.
And frankly its currency value is only a part of the problem with the trade deficit not the end all be all.
posted
Mao putting an end to the Great Leap Forward wasn't the end all be all either, but it still needed to happen.
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Blayne Bradley
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I don't think you've read my post right, people are complaining and latching onto the issue of the exchange rate without considering or appreciating the broader picture of it or realizing that its only a factor of the deficit not the cause of it.
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Yes it does. Nobody is saying, "Oh man once China completely un-pegs our economy is going to rocket us all to riches." But virtually every major US economist is saying that China shouldn't keep pegging it's currency to the dollar, the time for that has passed.
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posted
Mind you, while I'm on the fence on this matter, I would note that the "US economist" part of that is hardly convincing in China these days, or in Hong Kong for that matter (which also has a pegged currency, under both the British and the CCP).
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posted
Actually, you'll find a lot of economists who don't think it will benefit the US at all arguing that China's exchange rate peg is ill-considered right now. They point out that China is making its own people worse off in order to subsidize cheaper consumption abroad.
Think about it: a large part of the reason for the overheating problems China experiences is the exchange rate. In addition to how the exchange rate makes foreign goods (which we know Chinese people want a lot of, now that many of them have spare money) more expensive (and thus Chinese people less well off), the government also spends large sums of money to combat overheating. It just doesn't make sense.
quote:Originally posted by fugu13: Actually, you'll find a lot of economists who don't think it will benefit the US at all arguing that China's exchange rate peg is ill-considered right now ...
If thats a response to me, I never suggested that self-interest is the main reason why US economists are regarded with suspicion these days. (Although, I will freely say that it is a contributing factor).
Also, the second link doesn't seem to quite back up the case that the currency should float
quote:Talking about mounting pressure from countries like the United States on yuan appreciation, Cheng said, China should keep the yuan exchange rate "basically stable at reasonable levels" but with more flexibility.
posted
I was pointing out that it wasn't just US economists saying things about exchange rate adjustment.
And you might take a look at how I referred to the second link, again . A pronouncement like that from a Chinese politico at that level is practically yelling from the rooftops.
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posted
Thats all well and good, but I never said that it was just US economists that were saying things (after all, it's not like Canada's economists are much happier just less noisy), just that they're seen as particularly unconvincing.
As an example of the reverse, just like how many Americans might find the following pronouncement from Goldman Sachs unconvincing
quote:Which brings me to the exchange rate. I have spent a lot of my career working on exchange rate models and am familiar with all the pitfalls. We have developed ours over the years at Goldman Sachs, including for the renminbi. At the moment, rather oddly, our model suggests that the renminbi is very close to the price that it should be. This has not always been the case. The model used to suggest the currency was undervalued by about 20 per cent, but it has moved by that degree in the past five years.
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So? I never said you said it was just US economists. You said negative reactions were strong due to it being US economists, so I gave an example of a major Chinese economist. This isn't a battle about disproving statements, this is a discussion, where people respond with useful information. I'm sorry if you thought I was somehow saying "you're wrong!", when I was just saying "what you say is true, but such people might want to take a look at other sources, such as these".
I can probably dig up a few more notable Chinese economists in favor of revaluation if you'd like, and what I hear second-hand is that they're even easier to find in Chinese-language venues. The volume does vary with the political climate, of course.
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posted
By the way, very interesting article you link. Especially that they point out how, once you ignore the political noise reacting to the US and Europe, currency flexibility is gaining a lot of traction in China:
quote:Indeed, and somewhat ironically, it is likely that if Washington and others could keep quiet, Chinese policymakers would probably be more eager to do things to ease the inflationary pressures arising from this growth, including introducing more flexibility to the exchange rate.
quote:Originally posted by fugu13: You said negative reactions were strong due to it being US economists ...
Not exactly. I would clarify by saying that I think negative reactions are strong when it is US economists being involved. Not that there are strong negative reactions in general.
quote:I'm sorry if you thought I was somehow saying "you're wrong!", when I was just saying "what you say is true, but such people might want to take a look at other sources, such as these".
Fair enough. I was thinking the former, but I accept the latter.
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posted
That's only inconsistent if you parse it strangely. If you parse it as just speaking to the negative reactions you specified (as makes sense, given they're the ones that came up in conversation), there's no inconsistency at all.
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. A pronouncement like that from a Chinese politico at that level is practically yelling from the rooftops.
