China Severs Its Currency's Link to Dollar

[kach22i]

Somebody explain to me how big this really is.

http://news.yahoo.com/s/ap/20050721/ap_on_bi_ge/china_currency;_ylt=Ah_xZRUwRVOnIWVg4ehTKVis0NUE;_ ylu=X3oDMTA3b2NibDltBHNlYwM3MTY-
BEIJING - China dropped its politically volatile policy of linking its currency to the U.S. dollar but retained controls on its exchange rate, switching the link to a basket of foreign currencies in a move that could push up the price of Chinese exports to the United States and Europe.

Didn't we invade Iraq because Saddam was going to do the same with his oil sales?

[legion]

This is a step towards making the yuan (SP?) free-floating. I expect this to have a positive effect on U.S. companies and makes Chinese imports more expensive, if I understand correctly.

I'm sure Shaun is in a good position to explain this one.

[RoninLB]

generally linking a new or expected to be respected currency to the US dollar is a stabilizing force. A country's currency that is expected to be respected has an obligation to the capitol markets to maintain that respect so the mkt's have confidence in it. The prob with China is that it is not a democracy which means it's potentially unstable and can turn it's previous policies on the whim of the controlling gov't.

personally I think this happened from pressure from the Bush administration. Many of Bush's economic policies are political and this could very well be another one.

the China success is partially because it's markets were somewhat stable. Having a floating China currency or China attempting to "fix" its exchange rate is potentially destabilizing. A destabilized China will have worldwide economic ramifications.

[tabs]

China has NO Central Banking System and has been using our Treasury Bill as sort of a CB....

NO WAY is Bush trying to destabilize China politically...it is NOT in the interest of the Global Economy...which GW is a creature of...

BY keeping the Yuan pegged to the $$$ the value of the Yuan was kept ARTIFiCIALLY LOW...now it will float along with other currencies based upon the relative economic strength of it's economy....this will make US products more competive in China, while Chinese products will be more fairly priced in the USA..the Chinese hav played games with dumping and pricing of products in the US for years....which has given them an unfair trade advantage... the only loser in this is Walmart, which imports Billions of goods from China...now their prices are going to go up a bit...

The esteemed Senator from NY..Charles Schumer is a fking oportunist pimp....if U recall a month ago he was threatening to sponsor Trade Tarriff of up to 27% against China if it didn't decouple it's currency from the $$$$.....He was doing it for PR's sake...he knew very well from his contacts that something was a foot and wanted to make himself look good by rattling the saber of legislation....

[TheMentat]

Originally posted by tabs
China has NO Central Banking System

umm... yes they do: http://www.pbc.gov.cn/english/

[tabs]

Maybe I'll get it right this time.......They use our Treasury Bills as backup wealth to stabilize their currency...

[ronin]

still not quite right, bunboy. the dumping was not as a result of pegging the Cy against the $, but rather that the companies that dumped products were subsidized by the Chinese government, which enabled them to dump the products at a low price. kinda like Airbus vis a vis Boeing

[Shaun @ Tru6]

Quick thoughts, this is not something to jump to conclusion on, but we can say:

Prices have been artificially low for quite some time, prices to which we've become addicted.

The 2.1% revaluation will have a negligable impact in the near-term.

Prices will rise as Chinese labor rates will rise. China will create a middle class off the backs of our purchases at Wal*Mart.

That means either we pay more or retailers make less. Which do you think it will be?

My long-term prediction: Since we've offshored our manufacturing base and now have an economy based on IP, and since IP can be easily stolen or simply reverse-engineered, over time we'll be paying more for items that could have been made in this country for less. This is a long-term view.

Essentialy, given our addiction to China's price/production infrastructure, meaning retailers "just place reorders vs. creating a spec, shopping it, prototyping, entering into MFG agreements, etc.", China having more flexible control over their monetary policyt will allow it to take advantage of our addiction, slowly increasing prices. Not so much that we will look into the latter above, but enough so that our margins get lower and lower, which will negatively effect our economy. It will take A LOT for someone to reinvest in a US manufacturing base. My guess it will never happen, we'll just look to another 3rd world country to up its production. Africa is virtually untapped. Of course China buying up natural resources is a concern. If I were China, I would buy all of Africa and South America, much of Central America.

Like Rove, this bears sitting back a while to see how it pans out in the next month, 6 months.

[alf]

My take is that a up-valued CYuan will put some inflationary pressures on the US economy. This means that not only gas is taking a price hike but so is just about everything i wear and 50%+ of the stuff i consume will cost more.

My Macroeconomics is a little rusty, but i think increased inflation will typically cause an increase in nominal interest rates. This might have a negative impact on our mortage rates (they go up), which i think is one of the key drivers of our real estate bubble. Inflation up, interest rates up, real estate bubble go pop.

Good for the US manufacturing base?
Perhaps, but with our Unions and high labour cost, i think that this is a pipe dream. US companies will simply find less expensive alternatives. Japan and later Taiwan went through a similar cycle in the 70s and 80s.

Creat more US jobs?
Not sure if these are the types of jobs we want.

Good for China?
Probably. Their currency is about 50% undervalued on a PPP basis with the US from what i have seen when i was there. If they are planning to do more offshore investment and purchase foreign goods, then it is a good thing to have a stronger exchange rate.

I sort of like it when their currency is undervalued, it is sort of like the entire country is having a big sale and we are the cosumers benefiting from it

Time will tell what will happen.



alf

[alf]

Originally posted by tabs

... the only loser in this is Walmart, which imports Billions of goods from China...now their prices are going to go up a bit...

Actually, the US consumers loose because we will have to pay more for our Nikes and DVD players. Sam will simply pass the savings, er i mean mark ups to bubba and me.

I do not expect my boss to come into my office tomorrow and say, "Hey Alf, the Chinese just raised the value of the Yuan and given that 50% of the stuff you buy are Chinese made, i will give you a raise to make up for that!... Oh and here is a raise to cover the increase in gas prices too while we are at it, retroactive."

[RoninLB]

this is one situation were politics could have huge unintended consequences. The icing on this cake would be for politics to disturb the free trade momentum.

[jyl]

I initially thought this was merely a one-time 2% revaluation, but it seems like the yuan will (in theory) be alllowed to float to any natural level vs the basket of currencies, with a maximum move of 0.15%/day.

The following is from the Wall Street Journal

China Drops Yuan's Dollar Peg,
Will Let Currency Float in Band

White House Welcomes Move,
Vows to Monitor Implementation

By MICHAEL M. PHILLIPS
Staff Reporter of THE WALL STREET JOURNAL
July 21, 2005 5:34 p.m.

China announced suddenly its long awaited change to its currency policy, saying it will no longer peg the yuan to the U.S. dollar but instead let it float in a tight band against a basket of foreign currencies.

The yuan has been strengthened, effective immediately, to a rate of 8.11 yuan to the U.S. dollar -- compared to the 8.28 yuan it has been set at for more than a decade. The new trading regime will begin Friday, the government said in an announcement on state television.

The yuan will now be allowed to trade in a tight 0.3% band against a basket of foreign currencies, the government said. It didn't say which currencies. It said the central bank would announce the yuan's closing price each day, and that rate would be the midpoint of the next day's trading band.

[rest omitted]



In theory, the yuan could move about 3.3%/month against the basket, if it made the maximum move every day and always in the same direction.

Doesn't sound like much, but in a year it could in theory move about 46%, which would be a lot.

Given everything we've heard about the yuan being grossly undervalued, it will be interesting to see if the yuan heads inexorably up - a limit move every day, day after trading day, week after week, month after month. I wonder if the Chinese will actually permit this. If they do, I'd call that a pretty legitimate floating currency - maybe a slow-motion float, but still a float. That would be a big and impressive step by the Chinese government.

[island911]

Originally posted by RoninLB
... .which means it's potentially unstable and can turn it's previous policies on the whim of the controlling gov't. ..

Spot-on.

IMO, this is the end game.

[RoninLB]

Originally posted by jyl
, it will be interesting to see if the yuan heads inexorably up - a limit move every day, day after trading day, week after week, month after month. I wonder if the Chinese will actually permit this. If they do, I'd call that a pretty legitimate floating currency - maybe a slow-motion float, but still a float.

I'm going to watch Wall St currency traders for good entertainment.. kinda like throwing China into a pool full of sharks imo.

[alf]

Originally posted by RoninLB
I'm going to watch Wall St currency traders for good entertainment.. kinda like throwing China into a pool full of sharks imo.

Is the CY traded on the open market? I suppose that it is now 'unpegged', traders will create derivatives.

[bryanthompson]

I'm sorry, but the first sentence of that article makes no sense:

China announced suddenly its long awaited change to its currency policy...

It was a sudden announcement about something that's been long awaited?!
I get points taken off if I write a sentence like that.

[RoninLB]

Originally posted by island911

IMO, this is the end game.

close.

allow me to add to the China wild card.
If anti free trade turns out to be a winner the curve will allow a serious weakening of our capitol markets. It'll be an invisible hand in a choke hold because our market thinkers have no experience with this rarely happening event. All wrong explanations will be given.

"IMO, this is the end game. "

[jyl]

I'm thinking a significant yuan rise against the US dollar makes a lot of US companies look like shorts.

[RoninLB]

Originally posted by alf

Is the CY traded on the open market?

I suppose that it is now 'unpegged', traders will create derivatives.

I have no idea of the details of what will soon happen. I do believe that creative blood thirsty market makers will create something to feed from.

I guess the depth of the layered derivatives will be a good idea of the envelope? I would think NYC CPA's that do banks, mortgage bank, etc audits & work-outs will eventually see them all. Everyone has to eventually deal with banks.

[artplumber]

Interesting to see some concerned that they will be paying more at WalMart (or many other stores) for items. Are these the same folks concerned about losing jobs to the Chinese?

The yuan has a long way to go (up) in valuation before it meets it's natural ceiling given the strength of the economy.

Unclear effects are things like how much more economic influence China will have in the US because the US owes a lot of dollars to China and the yuan will eat even more dollars with a higher exchange rate. Further, some have suggested the mild slowing in oil prices will be a thing of the past since the growing economy in China will be able to purchase more oil (or other raw materials) with a higher valued yuan.