How Does Chinese Currency Work?

[AWoodside]

Hey, sorry if this isn't the right forum for this, but it seems like the most appropriate to me.

My friend was trying to describe to me why people think the way China operates their currency is a bad thing, and I just don't really get it. The way he explained it is that they peg their currency (the yuan) to the dollar, artificially deflating it's value. So for example, if it would trade in the open market at 3yuan = 1dollar, china might artificially enforce a 7yuan = 1dollar exchange rate (don't know if these are the right numbers). He said that this allowed them to export their goods cheaper, making it harder to compete, and so it was bad for the US economy. He said something about how if they traded their yuans on the open market they would have to pay their people more and wouldn't be able to export their goods as cheaply... and I just don't get how this works.

So is the argument really that artificially devaluing their own currency benefits them somehow? And hurts us?? How can this be the case? Something must be wrong about either the way he explained things, or the standard analysis. I don't really get all the particulars and would be very interested to hear somebody that does summarize the situation.

[tolbiny]

[ QUOTE ]

So is the argument really that artificially devaluing their own currency benefits them somehow? And hurts us?? How can this be the case? Something must be wrong about either the way he explained things, or the standard analysis. I don't really get all the particulars and would be very interested to hear somebody that does summarize the situation.


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Don't forget that its not the Chinese devaluing their currency, its a very small isolated group devaluing their currency (if what you describe is true).

[AWoodside]

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[ QUOTE ]

So is the argument really that artificially devaluing their own currency benefits them somehow? And hurts us?? How can this be the case? Something must be wrong about either the way he explained things, or the standard analysis. I don't really get all the particulars and would be very interested to hear somebody that does summarize the situation.


[/ QUOTE ]

Don't forget that its not the Chinese devaluing their currency, its a very small isolated group devaluing their currency (if what you describe is true).

[/ QUOTE ]

Right... this is the only kind of thought-line that makes it start to make since to me. If devaluing their currency in this way somehow allows the people in charge to trick their people into working for less true value... I suppose that would make sense... but this still seems not quite right. I just don't get what's happening, and google searches aren't helping very much, partly because I don't know what to search for exactly.

[kimchi]

I don't believe the US government wants the Chinese to un-peg their currency to the $US, despite public whinging to the contrary.

Should the currency be allowed to float freely it would undoubtedly rise and cause huge inflationary pressure in the US - pressures the economy isn't prepared for.

The bollocks CPI numbers pumped out by your Fed hide true inflation, and the trailing headline numbers aren't much better.

The US government isn't as stupid or culturally unaware as many people believe. They must have a reasonable understanding of the concept of Asian 'face' and authoritary independence.

If the US government wanted the Chinese to allow their currency to freely float and increase in value, the correct course of action would be to publicly demand it remains pegged to the $.

The US are calling their bluff (and buying time as they have been since the mid-90s) to try and fight off inflation.

Regardless, if imported Chinese goods became more expensive, there would be many other countries lining up to undercut over-priced, US made goods (especially since US-made goods have such a poor quality reputation overseas).

[ShakeZula06]

[ QUOTE ]
Hey, sorry if this isn't the right forum for this, but it seems like the most appropriate to me.

My friend was trying to describe to me why people think the way China operates their currency is a bad thing, and I just don't really get it. The way he explained it is that they peg their currency (the yuan) to the dollar, artificially deflating it's value. So for example, if it would trade in the open market at 3yuan = 1dollar, china might artificially enforce a 7yuan = 1dollar exchange rate (don't know if these are the right numbers). He said that this allowed them to export their goods cheaper, making it harder to compete, and so it was bad for the US economy. He said something about how if they traded their yuans on the open market they would have to pay their people more and wouldn't be able to export their goods as cheaply... and I just don't get how this works.

So is the argument really that artificially devaluing their own currency benefits them somehow? And hurts us?? How can this be the case? Something must be wrong about either the way he explained things, or the standard analysis. I don't really get all the particulars and would be very interested to hear somebody that does summarize the situation.

[/ QUOTE ]
I've heard this before but also haven't heard it explained in a way that makes sense to me (likely my fault).

[iron81]

I'm pretty sure that the Chinese govt. does this by offering to buy dollars with Yuan at whatever they want the price to be (I think its 9 Yuan : $1), regardless of the true market value. Since the Chinese are offering more for dollars than anyone else, the value rises to the Chinese government level.

What this means however is that China has tens of billions of dollars sitting in accounts or used to buy stuff. I have only a vague recollection of what the stuff it, but I think it includes foreign companies and US T-Bills (Government debt).

[AzDesertRat]

That's more or less true. They artificially support their currency by buying and selling dollars to keep the yuan in a tight range. It works if you have the capital, but as Argentina found out a few years ago, it has it's consequences. A lot of the countries in the Persian Gulf do this also, but they have the aforementioned capital to do this.

IMO, the Chinese yuan is probably undervalued by ~10% or so and needs some minor tweaking. Those people and politicians that are calling for China to allow its currency to float are [censored] in the head. They either have a half baked notion of macroeconomics and international finance or are trying to get elected on this ill conceived idea. The shocks that this would send to the world truly be staggering.

I wonder if they would resign when confronted with this failure or will they cry out "who could have seen this happening" [img]/images/graemlins/shocked.gif[/img]

[AWoodside]

[ QUOTE ]
That's more or less true. They artificially support their currency by buying and selling dollars to keep the yuan in a tight range. It works if you have the capital, but as Argentina found out a few years ago, it has it's consequences. A lot of the countries in the Persian Gulf do this also, but they have the aforementioned capital to do this.

IMO, the Chinese yuan is probably undervalued by ~10% or so and needs some minor tweaking. Those people and politicians that are calling for China to allow its currency to float are [censored] in the head. They either have a half baked notion of macroeconomics and international finance or are trying to get elected on this ill conceived idea. The shocks that this would send to the world truly be staggering.

I wonder if they would resign when confronted with this failure or will they cry out "who could have seen this happening" [img]/images/graemlins/shocked.gif[/img]

[/ QUOTE ]

Seems a little apocalyptic for something that only needs minor tweaking.

Another aspect that is deliciously ironic to me, assuming I'm understanding it correctly, is that people keep saying they're "artificially" changing the value of their currency by trading in dollars. So if a currency is backed by the dollar its value is artificial eh? I wonder why that is?

This whole thing just seems like insanity to me. I think I'm going to read that mises page over the next few weeks and see if that gives me any insight.

[esad]

The Yuan is no longer just pegged to the dollar. In 2005 it was removed and is now pegged to a basket of currencies dominated by the the Dollar, Euro, Yen and the Won(Korea).

[tolbiny]

[ QUOTE ]
[ QUOTE ]
That's more or less true. They artificially support their currency by buying and selling dollars to keep the yuan in a tight range. It works if you have the capital, but as Argentina found out a few years ago, it has it's consequences. A lot of the countries in the Persian Gulf do this also, but they have the aforementioned capital to do this.

IMO, the Chinese yuan is probably undervalued by ~10% or so and needs some minor tweaking. Those people and politicians that are calling for China to allow its currency to float are [censored] in the head. They either have a half baked notion of macroeconomics and international finance or are trying to get elected on this ill conceived idea. The shocks that this would send to the world truly be staggering.

I wonder if they would resign when confronted with this failure or will they cry out "who could have seen this happening" [img]/images/graemlins/shocked.gif[/img]

[/ QUOTE ]

Seems a little apocalyptic for something that only needs minor tweaking.

Another aspect that is deliciously ironic to me, assuming I'm understanding it correctly, is that people keep saying they're "artificially" changing the value of their currency by trading in dollars. So if a currency is backed by the dollar its value is artificial eh? I wonder why that is?

This whole thing just seems like insanity to me. I think I'm going to read that mises page over the next few weeks and see if that gives me any insight.

[/ QUOTE ]

This is my working hypothesis.

China starts of way behind Western countries, Japan a few other Asian countries, (lets jsut say around WW2) for a variety of reasons. Because of thier economic/political system (communism) they fell farther and farther behind. China still "progresses" but at a much slower rate than western countries, when china gets to the point that it can manufacture and export large quantities of goods desired in the west the power structure is threatened. Manufacturing jobs pay more/provide better conditions than subsitance, or even larger scale farming. The better pay allows for more savings which leads to an ability to invest. Typically initial investments are not market or stock related in the way the west thinks becaues we have passed this stage (at least middle class and up and some of the lower classes).

The first stage is investment in education for their children. Of ocurse this is hella dangerous for the elite if that education occurs outside of state run schools. Naturally state run schools wont teach them much to be afraid of so they really have to worry about out of state schools. Here's where devaluing their currency comes in. Artificially lowering their prices reduces pay for workers in china in realation to other curencies. This makes it harder to pay for forgien products- be they manufactured products, software, travel, or schooling in these other countries. This limits the overall exposure of the populace to new ideas, new leaders and new threats. Meanwhile they also gain a bargining chip with the west. They hold their currency artificially low which encorages forgeiners to trade dollars, euros ect with them for their yaun. This gives them a stockpile of hard currency or valuable entities like manufacturing plants which they can use to threaten other politicians. Say they want to invade taiwan, the longer and the more expensive the war gets the more dollars they will dump back into the world economy. This devalues the dollar, makes imports more expensive for US consumers and threatens a recession while the US economy shifts its investments to adjust for new prices. If uninterferred with it means a brief recession and then reopening of US plants and growth resumes.
Of course "brief" could be a year or more, which if in an election year could cost politicians their jobs. This would lead to countries like the US to be less likely to want to aid Taiwan which would drag the war out.