exchange rate fight!
May 9, 2005 3:28 PM Subscribe
This week, apparantly, the financial movers and shakers in the US have "toughened up" their demand for China to let their currency float with respect to the US dollar, saying, among other things, “Failure to move on the renminbi means China is also not doing its fair share in reducing global payments imbalance"
If their fixed exchange rate is the reason for China's enormous growth, what reason would they have to oblige?
I've never heard an economist suggest "good will" as a motive for matters of international finance before. Frankly, it sounds (to my untrained ears) more like begging. Does the US hold any cards here? What risks does China take by not giving in?
I've never heard an economist suggest "good will" as a motive for matters of international finance before. Frankly, it sounds (to my untrained ears) more like begging. Does the US hold any cards here? What risks does China take by not giving in?
China is holding quite a bit of U.S. government debt, which is denominated in U.S. dollars. If the dollar collapses, the debt loses a lot of value.
posted by mr_roboto at 4:46 PM on May 9, 2005
posted by mr_roboto at 4:46 PM on May 9, 2005
May I point out that the linked article indicates that the renminbi is artificially undervalued relative to the US dollar because of the currency peg. Letting it float would have the effect of increasing the value of the renminbi and decreasing the value of the dollar.
posted by mhum at 6:13 PM on May 9, 2005
posted by mhum at 6:13 PM on May 9, 2005
For one thing, the US threatens that they will impose import duties on Chinese products if they don't cooperate.
Not only is China holding US debt, but defending the currency peg keeps them accumulating more of it at a fantastic rate. That causes some stress on China's economy in various ways.
China would be increasing the value of its currency... thus decreasing the value of its US$ holdings in terms of Chinese yuan. They'd be losing money that way, but the idea is that they should do it soon to avoid even bigger problems later. There are various bad things that could happen. The US being driven so thoroughly into financial ruin that it can no longer keep buying all those Chinese exports is the most obvious, if not the most likely.
posted by sfenders at 6:28 PM on May 9, 2005
Not only is China holding US debt, but defending the currency peg keeps them accumulating more of it at a fantastic rate. That causes some stress on China's economy in various ways.
China would be increasing the value of its currency... thus decreasing the value of its US$ holdings in terms of Chinese yuan. They'd be losing money that way, but the idea is that they should do it soon to avoid even bigger problems later. There are various bad things that could happen. The US being driven so thoroughly into financial ruin that it can no longer keep buying all those Chinese exports is the most obvious, if not the most likely.
posted by sfenders at 6:28 PM on May 9, 2005
Not that it's certain that a revaluation would be good for the US. Here's Nouriel Roubini's take on it.
posted by sfenders at 6:38 PM on May 9, 2005
posted by sfenders at 6:38 PM on May 9, 2005
mhum:
Not sure why youre pointing that out. The renminbi being undervalued is part of what makes Chinese exports cheap to American consumers, who buy them by the freightload, thus its a reason for Chinas growth, as suggested in the question. Am I missing something?
posted by -harlequin- at 6:42 PM on May 9, 2005
Not sure why youre pointing that out. The renminbi being undervalued is part of what makes Chinese exports cheap to American consumers, who buy them by the freightload, thus its a reason for Chinas growth, as suggested in the question. Am I missing something?
posted by -harlequin- at 6:42 PM on May 9, 2005
If you can pick up today's Wall Street Journal (library, perhaps?) you'll see a good article in the editorial section that discusses the issue, and comes out against any kind of US action that forces revaluation.
posted by Kwantsar at 6:42 PM on May 9, 2005
posted by Kwantsar at 6:42 PM on May 9, 2005
Response by poster: sfenders: China would be increasing the value of its currency... thus decreasing the value of its US$ holdings in terms of Chinese yuan. They'd be losing money that way, but the idea is that they should do it soon to avoid even bigger problems later. There are various bad things that could happen. The US being driven so thoroughly into financial ruin that it can no longer keep buying all those Chinese exports is the most obvious, if not the most likely.
I'm curious what the other bad things that could happen are. Say the world suddenly writes off the US dollar, and China's debt holdings become suddenly worthless. It seems to me the boost in their economy until that point, and maybe the elimination of a competitor, would compensate.
Kwantsar: I'll try to dig up a copy of the WSJ. The G-7 must have released a statement, because it seems everyone is editorializing about this today.
posted by Popular Ethics at 8:02 PM on May 9, 2005
I'm curious what the other bad things that could happen are. Say the world suddenly writes off the US dollar, and China's debt holdings become suddenly worthless. It seems to me the boost in their economy until that point, and maybe the elimination of a competitor, would compensate.
Kwantsar: I'll try to dig up a copy of the WSJ. The G-7 must have released a statement, because it seems everyone is editorializing about this today.
posted by Popular Ethics at 8:02 PM on May 9, 2005
Response by poster: Thanks for the Roubini link sfenders. It's (somewhat) comforting to know I'm not the only one worried about the consequences of all this sabre-rattling.
posted by Popular Ethics at 8:26 PM on May 9, 2005
posted by Popular Ethics at 8:26 PM on May 9, 2005
There was a relatively recent IMF paper on exchange rate flexibility (PDF) that included some discussion of why China might want to. Note that the "flexibility" they talk about doesn't necessarily mean floating - it could mean accepting a wider band of values or using a weighted currency basket, as some other currencies do.
posted by milkrate at 10:04 PM on May 9, 2005
posted by milkrate at 10:04 PM on May 9, 2005
- harlequin -:
I was under the (probably mistaken) impression that two of the previous commentators were implying that unless China floated its currency, the US dollar would fall.
posted by mhum at 10:14 PM on May 9, 2005
I was under the (probably mistaken) impression that two of the previous commentators were implying that unless China floated its currency, the US dollar would fall.
posted by mhum at 10:14 PM on May 9, 2005
China is holding quite a bit of U.S. government debt
That's putting it mildly. Billmon has had a couple of interesting posts on this and related topics lately.
posted by stavrosthewonderchicken at 2:34 AM on May 10, 2005
That's putting it mildly. Billmon has had a couple of interesting posts on this and related topics lately.
posted by stavrosthewonderchicken at 2:34 AM on May 10, 2005
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posted by letterneversent at 3:31 PM on May 9, 2005