Sunday, November 15, 2009

Is China manipulating currency?

It is partly true that Chinese manipulate the currency. However, it has no effect on American export to China (explain later). As American culture (or all others too), it is easy to blame others than ourselves: it is nothing wrong with our government and our citizens (both are big spenders and fight the wars we cannot afford), but the ‘evil’ Chinese.

- Chinese currency and Hong Kong too were basically pegged with US’s, so it would not affect import/export with currency fluctuations. Now, it is pegged mainly with US and EU.

- Most countries would like to increase the value of its own currency. If you borrow from me with my country’s currency and it increases its value by 10%, you need to pay me 10% more with your own currency.

For the same scenario, I can buy your country’s assets (like land, factories…) 10% cheaper.

- The drawback. It discourages import from US to China in theory if Chinese currency is adjusted to the market.

It is not true as US and China are perfect trade partners. The majority of Chinese goods are of cheap, low-cost consumer products and US goods are of high-tech and agricultural products … In a sentence, they do not compete with each other in general.

China keeps the currency close to US, so it has to eat their profits by reducing jobs loss. The US consumers benefit by low cost consumer goods. It is not true if you argue the jobs would stay in US. With the US high salary, it would go to other developing countries if not go to China. So, it is a win-win situation for US.

- What happened if China cashed in the US debts. US economy would run further down. China living standard would be improved. However, there will be more folks out of work and hence cause social unrest. It is a trade off China has to make, but no one will finance US's reckless spending for ever.

- One way is go back to the gold standard that was removed by US. Basically your currency value is adjusted by the gold reserve in your central bank.


  1. Jerry says:

    agree with a lot of what you say. I’d also like to add: if the goal is to keep jobs at home, a country should do NO TRADE with outsiders. That will keep 100% of the jobs at home. Of course, you’d lose 100% of the jobs that were involved in making things to be traded outside also.

    This currency manipulation thing strikes me as funny. Suppose you and I barter where I give you 5 apples for 3 oranges. Then through no pressure by you, I devalue my currency by 50% so now I give you 10 apples for 3 of your oranges.

    Who benefits?

    In a real economy, things are a little more complicated. Sometimes countries manipulate currency to temporarily gain a tactical edge. Sometimes, countries can try to monopolize an industry. But, there is no free lunch. There is a cost as you mentioned in your comment. It’s a dangerous game to devalue your currency for tactical reasons. The outcome may not be what you planned for.

  2. Jed Yoong says:

    Haiyah. Who is the “currency manipulator” who sold China lots of now almost valueless govt bonds? They are really good with this “rolling the money” game. Borrow money from China to buy China’s manufactured goods. ??

  3. Colin says:

    And as if the US is not a currency manipulator? It’s printing trillions of dollars hoping inflate its way out of the crisis. Just ask the EU what it thinks of the US monetary policy.

  4. * China has some examples of product dumping. A US expert added up the ingredients of making a certain steel wire. The final product from China was cheaper than the combined ingredients by a large margin. Of course, this practice cannot continue long-term. I bet they will charge full price when the US company abandons that product.

    * There are always trade wars when trade is not treated fairly. Usually they try to settle the conflict in the court first and usually do not have a good solution. China tries to avoid all of them, but just cannot. For example, some trade wars with Korea are just ridiculous and their embargo does not related to the conflicts and hurts both sides. Eventually, they settle their differences after ’saving’ faces on both sides.

    The import of rice or farm products to Japan could cause the politicians to lose his jobs.

    Import of Japan’s HSR technology was in very low-key to avoid nationalism in China. Many conflicts may not be money oriented.

    * US could be one of the few countries in the world that can close the door to outside world in trades and be self sufficient. At that time, we could buy a car double our regular cost and only lasts for 4 years, and Hollywood will be making half of the money. Free trade brings up the best for each country in theory.

    * US can control all the trade deficit and destiny should be in our hands. We should start with ourselves first. We should blame the addicts first than blaming the drug pushers, control our obesity than blaming the fast food chain, and blame our reckless spending than our bankers. We’re all grows-up, aren’t we? Do not act like a spoiled, cry baby any more!!!

    * High tech embargo is a separate topic. If you trace where the middle east and N. Korea missile technology comes from, it is not hard it is from China no matter how hard they hide. If you trace further, the initial Chinese technology is from US via Chien in McCarthy’s witch hunt. How ironic?

  5. China will not appreciate its Yuen: 1. Too much reserve in US dollar and US bonds (they just started not buying them). 2. Make products less competitive in the world market.

    However, China is changing focus and will appreciate its Yuen eventually: 1. Develop internal market. 2. Increase its own living standard.

    They will do it at their own pace, so is the right of every country. US has NO right to tell other countries what to do as if all countries are either your puppets or your enemies.