Revalue the Renminbi?

[Adam Montana]

I read - a lot, every day. This is from one of the newsletters I subscribe to - worth a read!

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Revalue the Renminbi Now?

Teeka Tiwari

The average politician would have us believe that, if only China would allow their currency to "float", then all of our trade deficit problems would simply melt away.

Their reasoning is that China keeping their currency artificially weak gives them an edge in their exports -- i.e. it keeps the price of their goods cheaper to consumers in other nations than if the Renminbi were allowed to float higher.

Having a "weak" currency is highly desirable if your economy is heavily export dependent. Again, this is because your products will be cheaper to foreign buyers as they convert their stronger currency into more of your weaker currency in order to buy your goods.

This is why the Japanese market will have a tendency to rally anytime the US Dollar increases in value over the Yen. A weaker Yen means a stronger dollar, which makes Japanese goods cheaper for US consumers.

If you are a net importer of goods (such as we are here in the US), then it behooves you to have a strong currency. Having a strong currency allows you to buy more foreign goods, and it keeps the price of your imports down. When America's currency gets weakened it drives import prices up and, among many other deleterious effects, it results in larger trade deficit numbers.

The Chinese Renminbi is a highly controlled currency that trades at a fixed rate -- or, "peg" -- to the dollar. Many economic pundits believe that the Renminbi is being held artificially low by the Chinese government. Estimates of the Renminbi's true value range anywhere from 15%-50% higher than the current official exchange rate of 6.6551 Renminbi to the Dollar.

Politicians argue that the Chinese enjoy an unfair advantage by keeping their currency undervalued. They suggest that, were the Renminbi be allowed to "float", America would buy less from China and sell more American products into the Chinese market.

So, what if all of a sudden the Renminbi were allowed to trade higher? Would a floating of the Renminbi really stoke greater demand for US goods by Chinese consumers?

The best answer I can give is that it is not a sure thing that China would start buying more "stuff" from us. If you push China to revalue the Renminbi, the bet you are making is that Chinese domestic demand would increase enough to actually make a dent in our trade deficit with them.

What is more likely to happen if the Renminbi is allowed to trade freely, though, is that we could actually see our trade deficit with China increase! This is because, as the Renminbi gets more valuable, Chinese exports become more expensive.

It isn't as if Americans would stop buying Chinese goods altogether, and the goods we continued to buy would cost more money out of our pockets. In order to prevent the trade deficit from increasing, therefore, we would need to see Chinese consumption of our goods exceed the additional cost American consumers would be incurring from a stronger Renminbi.

I don't know that the domestic Chinese economy is strong enough to make up that difference. If it isn't, then we'll be faced with three problems:

1. Our Trade deficit with China will increase, not decrease.

2. American consumers will have to pay more money for the same amount of "stuff". This hits the mid to lower tier income brackets especially hard, as they are the largest consumers of Chinese made goods.

3. Our national debt (which China helps fund) will become a whole lot less appealing to China as they watch the value of their huge Treasury holding decline as their currency increases in value.

All of these outcomes are negatives for the United States and, in my opinion, it's too big a risk to take at this time.

We need to let the domestic Chinese economy mature for a few more years in order to make sure that, when the Renminbi is allowed to float, there is enough demand there to offset the higher prices we will have to pay for Chinese goods.

What are your thoughts on this issue? I'd love to hear them ...

[ctoddy]

Hard to argue with the logic. As stated we are too entrenced with "Made in China." However the hope is that as the cost of goods do go up, it will make domestic production of those same goods increase. I think the mindset of those in power is longterm without any regards to the short term implications of a rise in the Renminbi.

[Hat-2-Pan]

Thanks Adam, could someone break it down or translate! Thanks in advance!

[Mammaw]

Adam, very educational. We keep hearing and thinking that it will save jobs if they go up in value, but this really shows how foolish that thinking is. I can see that we, the American people, would still buy "stuff" from China, and it would still be cheaper than most other Countries, but the Trade Deficit would continue to rise, but then only faster. And heaven knows we, the American people, owe China enough without going further in debt. Gives way to thought and I hope they wait AT LEAST 2 years.

[lechesuerte]

Thanks Adam...interesting angles. GO RV in 2010!!!

[Puff]

If this is a true why then would the USA want China to rv their currency...and why would China want Iraqi to get out of Chpter 7, if in fact they, Iraqi hoped to rv....China would need oil just like us all??? I know China has a contract for oil with Iraqi, just like a lot of outher country.

Chinese Renminbi is a highly controlled currency that trades at a fixed rate -- or, "peg" -- to the dollar. Many economic pundits believe that the Renminbi is being held artificially low by the Chinese government. Estimates of the Renminbi's true value range anywhere from 15%-50% higher than the current official exchange rate of 6.6551 Renminbi to the Dollar.

Read more: http://dinarvets.com/forums/index.php?/topic/45503-revalue-the-renminbi/#ixzz18D8zXWQk

[leola]

That all sounds very cerebral ,however you must remember that in reality china still has a wall around it .china is frozen in time,in regard to the rest of the world,and ,is going to hold that position until they absolutly have to change. China has had this mentality for 5000 yrs. wall and all,W e in the rest of the world are going to have to live with severe unimployment and loss of even more jobs for the forseeable future. we have these emerging nations coming along each generation or so who negatively impact the working world,no way to stop shifing wealth in this regard, All we can hope for is that we get rich here in iraq, and ,don`t have to rouble ourselves with being poor

[maulim]

The Fed did the same thing to Japan in the late 70's & 80's. Pused the Yen up and got them to buy 100's of Billions in Treasure Bonds and other investments in the US with a weaker Dollar. Once the Bonds and trade deficite reached the preset threashold, the Dollar rose suddenly against the Yen and imports fell and Japan found that they had been screwed and began to sell, but it was too late. Between Bonds, Realastate and Exports to the US which suddenly became worth around 50% in alot of cases, less than what they had bought or produced them for. ( Take a look back and you'll find this to be true.) Now the Fed is trying to do the same to China, deflate the Dollar and inflate the Yen and when those threashold are meet again, guess what happens to China, that's right, Japan all over again. They will do it to any Country if enogh money can be made. There are no accidents in the world of finance!

Monet Talks and BullshitWalks!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Reguards,

Maulim

[dogsutra]

i saw info about the yaun yesterday. any news about that as far as chinese currency?