help with understanding chinese currency

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Babakhani
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help with understanding chinese currency

Post by Babakhani »

Hi,

I read in many places about the Chinese unethical monetary policies. Something about China no revaluing its currency.

Can someone explain this to me? Don't know enough about economics to understand this yet.
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MekongTrader
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Re: help with understanding chinese currency

Post by MekongTrader »

Babakhani wrote:Hi,

I read in many places about the Chinese unethical monetary policies. Something about China no revaluing its currency.

Can someone explain this to me? Don't know enough about economics to understand this yet.
In short: China is being accused of manipulating its currency. By undervalueing its currency Chinese products are made artificially cheaper and thus more competitive.

Actually there's much more to it but I am sure others can explain more.

MT
Jack
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Post by Jack »

Americans buy lots of stuff from China and pay for it with U.S. dollars. The Chinese businessmen then have to take those U.S. dollars and exchange them for yuan so that they can pay their workers and buy their supplies locally. Since there is such a large supply of dollars in China, you would normally expect the price of dollars to be depressed when exchanged for yuan. (Large supply means lower prices). But instead of letting the money exchange markets set the price naturally, the Chinese government sweeps up the excess supply of dollars in China by buying them at higher prices. This keeps the exchange rate of dollars to yuan artificially high.

The Chinese government does this because they want the value of the dollar to be high and yuan to be low. The reason is that they want Americans to buy lots of Chinese stuff which they are more inclined to do with a strong dollar and relatively weak yuan. It makes Chinese goods cheaper to Americans. When Americans buy lots of Chinese stuff, they keep lots of Chinese workers employed. The Chinese government is willing to take a loss on the exchange rate as a public policy to promote higher employment. The Chinese government takes all of the dollars which they have collected and buy U.S. treasury bonds and other U.S. assets as an investment.

Whether this is ethical or not is a political and economic question. From the Chinese point of view it is a good policy to keep businesses expanding and people employed.

From the American point of view it is a mixed blessing. It means that Americans can buy Chinese goods more cheaply. On the other hand it makes American goods more expensive and harder to sell to China. Right now the U.S. imports a lot more than it exports which creates a negative trade deficit. In order to balance the deficit the U.S. dollar needs to drop in value so that imports are more expensive and exports are cheaper. This will cause imports to decrease and exports to increase. For some inexplicable reason a lot of U.S. politicians cling to the idea of a strong U.S. dollar. It seems to be a matter of pride. But to balance trade, the dollar needs to fall in value, which will allow more U.S. exports and create more American jobs.
Last edited by Jack on Sat Aug 08, 2009 1:49 am, edited 1 time in total.
grumel
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Post by grumel »

That must be a quite a funny definition for unethnical . Maybe the i need a foreigner as scapegoat for the financial crisis definition of unethnical :-)

China has a fixed exchange rate (or more precise an upper limit, but the market price would be far above the upper limit) below the exchange rate one would expect for a floating curency. You might want to read up on the Bretton Woods system, which was constructed under US hegemony and did exactly the same as the Chinese did.

From the Chinese point of view it is a good policy to keep businesses expanding and people employed.

The Chinese are not doing some Keynsian economics through devaluation as the UK does right now. They always kept the Yuan low, including when they had no unemployment problem whatsoever during the boom.

There are some other arguments pro undervaluation, but personally i dont buy them:
- More externalities from tradable goods, so undervaluation as subsidy for those is good
- Chinas adminisatration simply was not able to handle all the new money, so local spending would have been so extremly inefficient that a huge current accoutn surplus was better.
-China was scared of Asian crisis type market failure.

All not very convincing to me. I tend to think they are just backwarded mercantilists as often the case with dictatorships that hurt themself the most with their policy.
Last edited by grumel on Sat Aug 08, 2009 3:29 pm, edited 1 time in total.
gchan
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Post by gchan »

In a way, you could think of their monetary policy as a subsidy to Chinese exporters.

Why do some people say it is unethical? Subsidizing Chinese exports means that Americans get to buy cheap goods and hurts US manufacturers. So the US manufacturers whine about it and say that it is unethical.

In my opinion, it is a good deal for the US... in a way, China is giving the US free money. Money is flowing from Chinese taxpayers to American consumers... the money for their subsidy does not come from nowhere. Yes US manufacturing gets hurt; but resources allocated to those industries will find a place in sectors in which the US excels at- engineering, software, film/TV, etc. etc. As a whole, the US would be better off. I am of the opinion that sometimes job losses should occur and it is a good thing. It's like watching The Apprentice and Donald Trump not firing anybody and giving a job to everybody even if they are incompetent. I don't believe in giving people jobs for the sake of them having a job.
Bogle: Over a 50-year period, about 4% of all managers will beat the market. If you think I'm going to tell you it's impossible for my son to be in that 4%, you don't know me very well.
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stratton
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Post by stratton »

gchan wrote:In a way, you could think of their monetary policy as a subsidy to Chinese exporters.

Why do some people say it is unethical? Subsidizing Chinese exports means that Americans get to buy cheap goods and hurts US manufacturers. So the US manufacturers whine about it and say that it is unethical.
because it's considered "impolite" for major countries to not let their currency "float" against the others. I believe there are some WTO issues here.

Paul
gchan
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Post by gchan »

1- I'm not sure what politeness has to do with it?

2- A lot of countries implement protectionist policies... which seems to go against the idea of free trade.
Bogle: Over a 50-year period, about 4% of all managers will beat the market. If you think I'm going to tell you it's impossible for my son to be in that 4%, you don't know me very well.
Harold
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Post by Harold »

I thought this article (http://www.theatlantic.com/doc/200801/f ... se-dollars) covered it in an easy to understand way.
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Babakhani
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Post by Babakhani »

Thank you very much. Very disturbing.
Jack thanks for the time to answer and Harold, great article. Thanks you both
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