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).

[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).

[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.

[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]

[adios]

[ QUOTE ]
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).

[/ QUOTE ]

One of the reasons that the Chineese can maintain the peg they have to the US $ is due to the booming Chineese economy. The quantity equation of money: the quantity of money (M) times the velocity of circulation (V) equals the price level (P) times output (y), MV=Py. So can get away with printing more yuan to soak up the US $ and not significantly devalue your currency. If M increased by a great deal while V and y were constant the P would increase alot i.e. inflation. The Chineese and the Japaneese have and probably will continue to finance the U.S. budget deficit to a great extent.

[AzDesertRat]

Don't forget Opec either--with all of the oil revenue daily and the transactions taking place in USD, it helps support the dollar by increasing demand. Before GW and the rest of the neocons went after Saddam, Saddam had threatened to switch to the euro and this was taken seriously by some members of the administration.

[adios]

[ QUOTE ]
Don't forget Opec either--with all of the oil revenue daily and the transactions taking place in USD, it helps support the dollar by increasing demand. Before GW and the rest of the neocons went after Saddam, Saddam had threatened to switch to the euro and this was taken seriously by some members of the administration.

[/ QUOTE ]

I don't think that would make much difference.