Why Did China Just Devalue the Yuan? How Trade Works with Free-Floating Currency(cassandracapital.net)
cassandracapital.net
Why Did China Just Devalue the Yuan? How Trade Works with Free-Floating Currency
https://www.cassandracapital.net/post/why-did-china-just-devalue-the-yuan
134 comments
>...China can (and does) manipulate its currency and that devaluing one's currency is what has led to the shift of manufacturing jobs from the developed world to China...
That's not what the article says, it only really addresses recent events. The main reason goods manufactured in China have historically been cheap is that Chinese labour and land is very inexpensive in absolute terms. They had huge amounts of land that was under-utilised and hundreds of millions of rural people with little or no economically valuable work to do, with very low standards of living. That's the basic source of China's manufacturing cost advantage.
It's also not true that China has consistently devalued their currency, they have frequently acted to prop up it's value especially since the financial crisis. Before 2007 the Yuan was much weaker, at over 8 to the dollar. The recent slide in the Yuan was a result of the latest tariffs. China didn't act to devalue it, they simply stopped acting to prop it up.
So overall yes, a relatively weak yuan has served China well, but much of that weakness is due to structural economic reasons. Labour and land was cheap due to low labour and land utilisation. Labour was also cheap due to very minimal standards of living. Manufacturing capacity was cheap due to enormous economies of scale. Those aren't a recipe leading to a naturally strong currency.
That's not what the article says, it only really addresses recent events. The main reason goods manufactured in China have historically been cheap is that Chinese labour and land is very inexpensive in absolute terms. They had huge amounts of land that was under-utilised and hundreds of millions of rural people with little or no economically valuable work to do, with very low standards of living. That's the basic source of China's manufacturing cost advantage.
It's also not true that China has consistently devalued their currency, they have frequently acted to prop up it's value especially since the financial crisis. Before 2007 the Yuan was much weaker, at over 8 to the dollar. The recent slide in the Yuan was a result of the latest tariffs. China didn't act to devalue it, they simply stopped acting to prop it up.
So overall yes, a relatively weak yuan has served China well, but much of that weakness is due to structural economic reasons. Labour and land was cheap due to low labour and land utilisation. Labour was also cheap due to very minimal standards of living. Manufacturing capacity was cheap due to enormous economies of scale. Those aren't a recipe leading to a naturally strong currency.
China is still acting to prop up the yuan today. If they eliminated or even relaxed their capital controls there would be a massive outflow of wealth.
So you're saying the yuan hasn't been pegged to the dollar all these years? This is revisionism.
It was pegged but they pegged it at a number that was stronger than it would otherwise be. China fears capital flight more than anything, and rich people in China would absolutely sell their yuan for dollars or euros in an instant if they could.
Capital controls and the peg are why real estate in China is a bubble. There's no other place for people to put their savings. Rich people who know better don't trust the CCP.
Capital controls and the peg are why real estate in China is a bubble. There's no other place for people to put their savings. Rich people who know better don't trust the CCP.
What could the US do to assist in helping capital flight? I would imagine that just helping all the rich Chinese take their money out of China would go a long way to force Beijing's hand.
Allow paying for citizenship via investment.
"EB-5 program basically enabled Chinese investors to get their green cards through a $500,000 investment in a regional center project, or a $ 1 million direct investment in their own company."
https://www.forbes.com/sites/andyjsemotiuk/2018/06/22/the-l-...
https://www.forbes.com/sites/andyjsemotiuk/2018/06/22/the-l-...
Just become Swiss.
They did, but I believe GP is arguing they did it in the opposite direction as the recent movements.
To make sure terms are correct, "Weak" currency means higher Yuan:USD conversion rate. Devaluing your currency makes exports more attractive to other countries and tends to create capital inflows (my 1 USD can buy a lot more Yuans, meaning cheaper to buy buildings/business!).
"Strong" currency means lower Yuan:USD conversion. Flip above.
Looking at the past, there's an odd floor that happens originally at 8.5 in the late 90s and 2000s. Many argued this was intentionally weak to help grow their export economy.
Then the rate rose to 6.83 in the late 00s and 2010s. Some argued this was intentionally strong to prevent capital outflows. Since then the rate has been in the 6s and seems to float more naturally until the recent dive into the >7s, indicating a weakening of the Yuan. People always saw 7:1 Yuan:USD as the weakest point China was willing to let their currency fall.
So, in the recent past, they're accused of artificially keeping the Yuan strong (esp in the global financial crisis) but now it seems like they're allowing it to devalue naturally.
EDIT: for details/grammer
To make sure terms are correct, "Weak" currency means higher Yuan:USD conversion rate. Devaluing your currency makes exports more attractive to other countries and tends to create capital inflows (my 1 USD can buy a lot more Yuans, meaning cheaper to buy buildings/business!).
"Strong" currency means lower Yuan:USD conversion. Flip above.
Looking at the past, there's an odd floor that happens originally at 8.5 in the late 90s and 2000s. Many argued this was intentionally weak to help grow their export economy.
Then the rate rose to 6.83 in the late 00s and 2010s. Some argued this was intentionally strong to prevent capital outflows. Since then the rate has been in the 6s and seems to float more naturally until the recent dive into the >7s, indicating a weakening of the Yuan. People always saw 7:1 Yuan:USD as the weakest point China was willing to let their currency fall.
So, in the recent past, they're accused of artificially keeping the Yuan strong (esp in the global financial crisis) but now it seems like they're allowing it to devalue naturally.
EDIT: for details/grammer
The yuan is not pegged to the dollar in the traditional sense of the term. China is actually fairly opaque about how they set their rates but claim it’s against a basket of currencies. Here is a good discussion on it: https://www.cfr.org/blog/so-china-pegging-dollar-or-basket
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Thank you so much - I’m so glad you enjoyed it!
If you’re interested in this topic I highly recommend “The Great Rebalancing” by Micheal Pettis. A really good book that looks at how currency manipulation and other factors have created imbalance in the global economy.
I’ve also written a book which touches on this - but focuses more on the massive sovereign debt burdens that have been created in large part though these trade imbalances - particularly in an aging world.
https://www.cassandracapital.net/books
If you’re interested in this topic I highly recommend “The Great Rebalancing” by Micheal Pettis. A really good book that looks at how currency manipulation and other factors have created imbalance in the global economy.
I’ve also written a book which touches on this - but focuses more on the massive sovereign debt burdens that have been created in large part though these trade imbalances - particularly in an aging world.
https://www.cassandracapital.net/books
If you like Pettis, you may also want to subscribe to his blog:
https://carnegieendowment.org/chinafinancialmarkets/
I have enjoyed his perspective for years.
https://carnegieendowment.org/chinafinancialmarkets/
I have enjoyed his perspective for years.
He has an excellent blog - he’s also active on Twitter. I believe he’s @michaelxpettis
Excellent article, have one question, besides economics, the main reason a country can produce cheaply is dependent on highly productive labour, non union structure and friendly labor laws for industries. This is one of the reason besides Japan, Korea, Germany and China other countries did not fair that well. How do economist put value to this intangible forms?
Every country manipulate currency to some extent including USA. So why not revamp the system completely.
Every country manipulate currency to some extent including USA. So why not revamp the system completely.
Check out the "Impossible Trinity": https://en.wikipedia.org/wiki/Impossible_trinity
A country can have two of the following three w/r/t its currency (but not all three)
A country can have two of the following three w/r/t its currency (but not all three)
a fixed foreign exchange rate
free capital movement (absence of capital controls) # the USA likes this, or rather investors in the USA do
an independent monetary policy # most everyone wants this
Great article! I was not aware of China's need for dollars due to dollar denominated debt. One question I still have is how/why they ended up with dollar denominated debt as opposed to debt in RMB? Also, who currently holds this debt?
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Because the interest rate on RMB denominated debt would be (much) higher, since there is a significant currency risk.
“Recently China allowed their currency to fall below the key level of 7 yuan per dollar.“
China isn’t devaluing their currency, they are supporting it at its current level and artificially keeping it above 7.
When they stop supporting it, it decreases in value. Where would their currency go if they stopped propping it up?
China isn’t devaluing their currency, they are supporting it at its current level and artificially keeping it above 7.
When they stop supporting it, it decreases in value. Where would their currency go if they stopped propping it up?
Do they? All complaints I heard so far is CCP keeps yuan artificially cheap to prop the exports.
That hasn’t really been true since before the Asian financial crisis.
They have in the past (to fuel/build their export-driven economy), but I think things might have changed recently with the trade war.
Trade war is one reason, other is external debt in USD. This is explained in great details in article that China needs 100 billion dollars every year to service its external USD debt. So they don't want to let CN¥ fall in value significantly.
The really pivotal change was the financial crisis. Before that the Yuan was at over 8 to the dollar.
[deleted]
Doesn't letting it "fall" in the number of yuan per dollar actually mean it's stronger, i.e. more valuable?
The number of yuan per dollar getting lower does mean that the yuan is becoming stronger relative to the dollar. (It doesn't mean the yuan is becoming stronger; it could just be that the dollar weakened.)
But that would be called a "rise" in the yuan. A "fall" in a currency always means the opposite, that the value of the currency has dropped. In the usage you're questioning, the yuan "fell" to 7+ to the dollar from its previously higher value of 6+. It's not a reduction in the number of yuan per dollar.
But that would be called a "rise" in the yuan. A "fall" in a currency always means the opposite, that the value of the currency has dropped. In the usage you're questioning, the yuan "fell" to 7+ to the dollar from its previously higher value of 6+. It's not a reduction in the number of yuan per dollar.
Currency controls lead to capital flight and therefore add to devaluation pressures. But the first cause is currency control on the first place.
I think you have it backwards. If they stop supporting it, it will go down towards 6 yuan per dollar. If you own or want to buy a yuan, 1/6 USD is more value than 1/7 USD, hence the term devalue.
Nope. If they stop supporting it, it will get weaker and move towards 8.
https://www.npr.org/2019/08/05/748155575/chinas-currency-fal...
“China has long artificially propped up the value of its currency above the symbolic 7-to-1 threshold using a mixture of public and non-public methods, including ordering its massive state-run banks to buy up vast amounts of currency to strengthen the yuan, also known as the renminbi.
"The [Chinese] government has been, if anything, doing the opposite: protecting the renminbi from collapsing," says Jonas Short, head of China research at NSBO, an investment bank. "If you allow for the natural exchange rate for renminbi against the U.S. dollar, it should be about 7.2 to 7.3 per dollar."
https://www.npr.org/2019/08/05/748155575/chinas-currency-fal...
“China has long artificially propped up the value of its currency above the symbolic 7-to-1 threshold using a mixture of public and non-public methods, including ordering its massive state-run banks to buy up vast amounts of currency to strengthen the yuan, also known as the renminbi.
"The [Chinese] government has been, if anything, doing the opposite: protecting the renminbi from collapsing," says Jonas Short, head of China research at NSBO, an investment bank. "If you allow for the natural exchange rate for renminbi against the U.S. dollar, it should be about 7.2 to 7.3 per dollar."
No, you have it backwards. China has been keeping their currency artificially strong to avoid capital flight and a crisis in consumer confidence. So for the last ten years, it has been closer to 6 RMB/usd than 7 RMB/usd. This couldn’t last, and the yuan’s natural market value was closer to 7, even above 7 and maybe even 8. If China does nothing, the RMB falls in value, not rises.
Please read the parent comment I was replying to again.
>So for the last ten years, it has been closer to 6 RMB/usd than 7 RMB/usd. This couldn’t last, and the yuan’s natural market value was closer to 7
This was an artificial devaluing of their currency. It is called devaluing because it makes Yuan cheaper to buy (more exports from china) and USD harder to buy (less imports to china). From the title article: "China bids up the price of the dollar relative to the yuan by buying dollars with yuan, and then sits on these dollars".
>This couldn’t last, and the yuan’s natural market value was closer to 7, even above 7 and maybe even 8. If China does nothing, the RMB falls in value, not rises.
Historically, without interference, Yuan increases in value relative to the dollar (<7 RMB/usd). This makes Yuan harder to buy (Less exports from china) and USD cheaper to buy (More imports to china). This what the title article is discussing. Some believe that China has switched from devaluing to propping up the Yuan recentlyt
https://www.npr.org/2019/08/05/748155575/chinas-currency-fal...
>China's yuan plunged to below 7 per U.S. dollar on Monday morning
>So for the last ten years, it has been closer to 6 RMB/usd than 7 RMB/usd. This couldn’t last, and the yuan’s natural market value was closer to 7
This was an artificial devaluing of their currency. It is called devaluing because it makes Yuan cheaper to buy (more exports from china) and USD harder to buy (less imports to china). From the title article: "China bids up the price of the dollar relative to the yuan by buying dollars with yuan, and then sits on these dollars".
>This couldn’t last, and the yuan’s natural market value was closer to 7, even above 7 and maybe even 8. If China does nothing, the RMB falls in value, not rises.
Historically, without interference, Yuan increases in value relative to the dollar (<7 RMB/usd). This makes Yuan harder to buy (Less exports from china) and USD cheaper to buy (More imports to china). This what the title article is discussing. Some believe that China has switched from devaluing to propping up the Yuan recentlyt
https://www.npr.org/2019/08/05/748155575/chinas-currency-fal...
>China's yuan plunged to below 7 per U.S. dollar on Monday morning
Maybe, but what happens to the US federal budget once trade balances become more neutral and the demand for federal debt drops through the floor? If this is time limited, the US federal budget, and by proxy the US economy, is time limited.
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It should be noted that a central bank with a floating currency is constrained in its control of interest rates the more it controls foreign exchange and vice versa.
Using tariffs to constrain the actions of foreign central banks is really quite interesting. While China has succeeded in offsetting tariffs with inflation for now, they are paying for it by giving up policy flexibility, whereas the US can effectively control the price of the yuan with tariffs.
Using tariffs to constrain the actions of foreign central banks is really quite interesting. While China has succeeded in offsetting tariffs with inflation for now, they are paying for it by giving up policy flexibility, whereas the US can effectively control the price of the yuan with tariffs.
[deleted]
This is an awesome article! Is it possible to write an article about the next recession and it's implications? Our current financial health and environment is really different from the last one and every person I know keeps on telling how bad the next recession is going to be.
I am working on a post on just that topic now! if you subscribe on my website it will send you a notification when I publish a new blog post
https://www.cassandracapital.net/
https://www.cassandracapital.net/
Even if the next recession is mild, the US has very little room for a stimulus thanks our debt. It's hard to predict the depth of a future recession, but one can say for sure that we have fewer options because of the debt. Keynesian principle is basically a fancy form of "save up for rainy days". We didn't, so hope the storm is short.
$4t was printed to bail out the banks. What is stopping more money from being printed this time, in the form of economic stimulus?
If you mean "Quantitative Easing", it's arguable whether it's the same as "printing money". I won't get into that debate here.
In a related issue, there's a theory making its circles in both right and left camps that if inflation is sub-par for a while, say below 2%, then printing more money won't cause problems.
Why inflation is lower than expected is an economic puzzle. But printing money to avoid paying debt may create new economic puzzles. If they try it, try it gradually please.
(The ideal annual inflation rate tends to be around 2.0% to 2.3%, based on historical record. This is in aggregate. Highs or lows tend to affect different people differently.)
In a related issue, there's a theory making its circles in both right and left camps that if inflation is sub-par for a while, say below 2%, then printing more money won't cause problems.
Why inflation is lower than expected is an economic puzzle. But printing money to avoid paying debt may create new economic puzzles. If they try it, try it gradually please.
(The ideal annual inflation rate tends to be around 2.0% to 2.3%, based on historical record. This is in aggregate. Highs or lows tend to affect different people differently.)
(Hyper)Inflation?
its implications
The US really has China in a bind here, and few will admit it. China needs to weaken its currency to offset tariffs by making their exports cheaper...but China is very very short on dollars, and each devaluation makes their onshore debt much harder to maintain. I'm sure China is waiting out the 2020 election, hoping the next President will be more dovish on China...but I think everyone (except Biden) is pretty hawkish on China within that Democratic field.
>China is very very short on dollars
$3T of dollar reserves would like to have a word with you.
$3T of dollar reserves would like to have a word with you.
a) Investment banks don't believe that number is completely accurate
b) China has used a lot of reserves propping up offshore RMB.
c) It's a lot more complicated than that.
d) 1.2 trillion in dollar debt has to be rolled over just this year
https://www.bloomberg.com/opinion/articles/2019-01-06/china-...
b) China has used a lot of reserves propping up offshore RMB.
c) It's a lot more complicated than that.
d) 1.2 trillion in dollar debt has to be rolled over just this year
https://www.bloomberg.com/opinion/articles/2019-01-06/china-...
China has surpassed US last year in terms of consumption of retail goods.
China's advantage is no longer cheap labor TBH...It hasn't been cheap for a long time now.
America is unique and important...But so is China.
China's advantage is no longer cheap labor TBH...It hasn't been cheap for a long time now.
America is unique and important...But so is China.
If the Chinese protect their domestic market from American companies, then there is no point to staying on good terms with them.
Look what happened to Google. Google made all these concessions to the CCP and still got fucked.
China can't dangle the carrot of the Chinese market if they don't let American (or Japanese or European) companies have decent access to them.
China teases access, then pushes out the company after they steal their technology and intellectual property.
The world is finally wising up to this scam.
Look what happened to Google. Google made all these concessions to the CCP and still got fucked.
China can't dangle the carrot of the Chinese market if they don't let American (or Japanese or European) companies have decent access to them.
China teases access, then pushes out the company after they steal their technology and intellectual property.
The world is finally wising up to this scam.
True. I think reciprocity is the key here. China needs to open up its market to the world for the benefits of every party in the world trade. It has enjoyed a long enough special treatment to use a lot of domestic excuses to perform various protectionist acts, which needs to stop now.
But Google's case is a different one. They soured their relationship with China by themselves. I don't see how it is beneficial to be openly rebellious to local government in the market you wish to operates.
But Google's case is a different one. They soured their relationship with China by themselves. I don't see how it is beneficial to be openly rebellious to local government in the market you wish to operates.
"Soured their relationship" Really? Is that what you call letting the CCP filter search results?
Google made far too many concessions in my opinion and still got fucked.
Google made far too many concessions in my opinion and still got fucked.
So, the Chinese are evil. Maybe, but then, there is nothing exceptional about their evil.
If you are old enough you will remember when Japan were the evil one in the 80's.
Or we can go to the history books and see how all those tactics is what the USA used against Britain.
If you are old enough you will remember when Japan were the evil one in the 80's.
Or we can go to the history books and see how all those tactics is what the USA used against Britain.
The Chinese aren't evil, they are violating the WTO agreement and the US is using it's economic power to check them.
And comparing the USA and Britain is insane. It's like comparing brothers to complete strangers.
And comparing the USA and Britain is insane. It's like comparing brothers to complete strangers.
Japan was never considered evil in the 1980s, even the economic competition aspect is overblown in today’s view. China has always had a much more complicated relationship with the USA, even in the 80s when relations were at a peak due to the Sino Soviet split (and before Tiananmen).
This is a bit revisionist. As a kid I remember japan being pitched at the economic enemy quite a bit in the 80s and early 90s. "They're buying our country" was one refrain, like the claim with "the Chinese are why I can't buy a house" right now. Also things like https://en.wikipedia.org/wiki/Rising_Sun_(novel) and a lot of other fiction showing us (americanos) working for japanese business overlords. https://www.youtube.com/watch?v=CS_17xMmmLY for another example.
That is a even a bit more revisionist, our relationship with Japan was very friendly in the 1980s, and the economic competition aspect was more benign even in the rust belt. As long as we are drawing from pop culture, the movie Gung Ho (https://en.wikipedia.org/wiki/Gung_Ho_(film)) is a more accurate reflection of the sentiment of the time.
There has just to be a gung ho kind of movie for China, as far as I can tell. Likewise, Japan continued to be a top strategic ally of the USA in the 80s, it was never seen as a strategic competitor like China is today.
There has just to be a gung ho kind of movie for China, as far as I can tell. Likewise, Japan continued to be a top strategic ally of the USA in the 80s, it was never seen as a strategic competitor like China is today.
I remember relatives in the eighties expressing worries about the Japanese buying up farmland, and the movie Rising Sun or whatever - the theory being that what Japan couldn’t do militarily they were going to accomplish economically. There was concern about Japan as an enemy but never solidly like we have with China today. As you say, Japan never stopped being an ally, and China is barely this side of detente.
I agree - Everything was cool right up to the point where Japan started buying skyscrapers in NY then they became evil. But I would also agree before this gained any real traction, the Japan era was over. I think the issue with China is different. I think there are numerous unresolved tensions — too many to even enumerate here - that the US is unlikely to see China as anything but a competitor and vice versa. While I think it’s possible to avoid a conventional war, neither country seems to have thought about the consequences of an outright cyber war nor has either party developed any of the cyber stalemate equivalents that have kept nuclear war from happening so far.
>>"Japan was never considered evil in the 1980s"
I suppose we remember differently. An example: in 1991 George Friedman (the respected analyst, who, by the way, is predicting now the collapse of China) published "The coming war with Japan". Obviously the title is just "click-bait" but I think reflects what was in the zeitgeist then.
>>"China has always had a much more complicated relationship with the USA [..]"
Absolutely agree with that. After all, the constitution of Japan was basically redacted by the USA and militarily depends on the USA.
China is going to be a different matter and, that, I think, it's the real reason because China is considered even more "evil" than Japan, because subdue it it's going to be very difficult (if possible).
I suppose we remember differently. An example: in 1991 George Friedman (the respected analyst, who, by the way, is predicting now the collapse of China) published "The coming war with Japan". Obviously the title is just "click-bait" but I think reflects what was in the zeitgeist then.
>>"China has always had a much more complicated relationship with the USA [..]"
Absolutely agree with that. After all, the constitution of Japan was basically redacted by the USA and militarily depends on the USA.
China is going to be a different matter and, that, I think, it's the real reason because China is considered even more "evil" than Japan, because subdue it it's going to be very difficult (if possible).
Being a west coaster obviously biases me a bit, I guess if you were living in Detroit the sentiment would be different. Actually, our beef with japan back then was related to the, trying to export their real estate bubble abroad, which is exactly what the Chinese are doing today :) (stop overpaying us for our housing, dammit!). Japan was definitely not seen as a strategic competitor in the 80s, no one was afraid of an invasion coming from them.
Pacifism a actually popular sentiment in japan; right wingers in the USA wish japan would drift away from that.
Pacifism a actually popular sentiment in japan; right wingers in the USA wish japan would drift away from that.
> no one was afraid of an invasion coming from them
I don’t disagree, but it’s ironic that this was also the sentiment in the 40’s, and then Japan literally invaded (Alaska, after the surprise attack on Hawaii).
I don’t disagree, but it’s ironic that this was also the sentiment in the 40’s, and then Japan literally invaded (Alaska, after the surprise attack on Hawaii).
During World War Two, Japanese forces invaded two remote islands with less than ten thousand troops, voluntarily abandoned one island, and were kicked off the other a year later. It was in all likelihood a diversion during the Battle of Midway. With such a small force and so little materiel committed, it posed little real threat to the U.S. West Coast.
https://en.wikipedia.org/wiki/Aleutian_Islands_campaign
https://en.wikipedia.org/wiki/Aleutian_Islands_campaign
I went to the Toyota museum when I was visiting Japan. They had a display on how they got started: they purchased a Chevy vehicle from the US, brought it to Japan, disassembled it, and re-built it. Sounds familiar.
Very useful, in the context of this article, to see the details of the Eurozone trade balance, "Latest Eurostat data on international trade" [0]. The total surplus for the entire Eurozone is €20.6B.
Noteworthy to look at the top countries by trade surplus, where Germany represents the 900-pound gorilla:
Germany: +€111.9B
Ireland: +€33.9B
Netherlands: +€32.9B
Italy: +€22.1B
Czechia: +€10.8B
Everybody else is either close to zero, or negative. Here's the worst ones:
France: -€33.6B
Spain: -€15.8B
Greece: -€11.0B
Portugal: -€10.3B
[0]: https://trade.ec.europa.eu/doclib/docs/2013/december/tradoc_...
Noteworthy to look at the top countries by trade surplus, where Germany represents the 900-pound gorilla:
Germany: +€111.9B
Ireland: +€33.9B
Netherlands: +€32.9B
Italy: +€22.1B
Czechia: +€10.8B
Everybody else is either close to zero, or negative. Here's the worst ones:
France: -€33.6B
Spain: -€15.8B
Greece: -€11.0B
Portugal: -€10.3B
[0]: https://trade.ec.europa.eu/doclib/docs/2013/december/tradoc_...
On the flip side, a lot of countries that the United States trades with peg their currencies to the US dollar. See the last section (Why Countries Peg Their Currency to the Dollar) of https://www.thebalance.com/what-is-a-peg-to-the-dollar-33059... and https://www.thebalance.com/what-is-a-petrodollar-3306358 for details.
I would think it's better to have more imports than exports. The importer gets goods and services, the exporter gets numbers in a computer. Though I suppose it's a problem when the importer doesn't know how to take care of itself anymore.
the exporter then uses those numbers to buy resources (natural and political), real estate, media and influence inside importer. Until the importer is 100% dependent
When did this ever happen?
Then the importer has a revolution, wipes all debts and starts again.
Seizing the assets of foreign national corporations within the US would be mutual assured financial destruction. Markets would crash and plunge the country into depression/recession as foreign capital flees the US.
Didn’t happen when the US did it to Iran.
This article opens up with a mistake? It's 7 yuan per dollar. Not the other way around.
Whoops - good catch! Little dyslexia I guess! Thanks!
Interesting article. One thing that wasn't made clear - who is holding the new Chinese debt? Chinese consumers are the first borrowers, I assume, but then are local banks borrowing from the Chinese central bank? Is the central bank then borrowing from abroad, and why is this debt dollar-denominated? Why don't they just pay it off with cash instead of continuing to put that cash into US Treasuries?
PS, @joshuafkon, you have an unnecessary apostrophe in the "it's" in the last sentence!
PS, @joshuafkon, you have an unnecessary apostrophe in the "it's" in the last sentence!
What’s to stop exporting companies from increasing prices?
Say I’m a Chinese manufacturer of plates. I have an American customer buying 6m yuan worth every year. Previously that cost them $1m USD. Now it only costs them $857k. In both cases I’m getting 6m yuan, so I’m happy. Or, do I increase the price to 7m yuan because I know that’s what the customer Usually pays, now I’m VERY happy?
Does this achieve the goal of growth (6m to 7m yuan) or does it not count because the volume stayed the same?
Say I’m a Chinese manufacturer of plates. I have an American customer buying 6m yuan worth every year. Previously that cost them $1m USD. Now it only costs them $857k. In both cases I’m getting 6m yuan, so I’m happy. Or, do I increase the price to 7m yuan because I know that’s what the customer Usually pays, now I’m VERY happy?
Does this achieve the goal of growth (6m to 7m yuan) or does it not count because the volume stayed the same?
Well, currently (more or less) the devaluation just offsets the new tariffs that have been imposed. So in real terms there wouldn’t be a huge change.
Absent the tariffs it would depend on the specific supply and demand for the good. I suspect both the manufacturer and the customer would split the value in some way.
Interestingly, the growth to the economy arises through how the devaluation impacts the savings and consumption rate for the countries in question. Weakening the yuan depresses Chinese household consumption and subsidies foreign household consumption. It is this change in national savings and consumption that drives the trade balance.
Absent the tariffs it would depend on the specific supply and demand for the good. I suspect both the manufacturer and the customer would split the value in some way.
Interestingly, the growth to the economy arises through how the devaluation impacts the savings and consumption rate for the countries in question. Weakening the yuan depresses Chinese household consumption and subsidies foreign household consumption. It is this change in national savings and consumption that drives the trade balance.
Why does weakening the yuan depress Chinese household consumption? Aren't households buying Chinese goods with yuan, and therefore a weakening currency shouldn't matter? Or is it that they have less purchasing power for foreign goods and this effects household consumption?
A household has a fixed amount of yuan. More expensive foreign goods take up a larger portion of that amount, leaving less for domestic consumption. Imagine every household does it, leading to less demand for domestic goods.
Alternatively, households stop buying expensive foreign goods and substitute cheaper but potentially inferior domestic goods (eg. baby formula that may be laced with melamine). So domestic manufacturers can still win, even if households don't.
I’m under the impression - perhaps incorrectly - that a big portion of foreign goods are related to mobile phone services purchased from overseas vendors. It’s possible some of this can’t be substituted...but I don’t know what percentage of spending this represents.
That sounds unlikely, given that Google's Play Store is blocked in China and everybody uses local stores instead.
That's if the foreign goods are substitutible.
Presumably a lot of domestic Chinese goods require materials from abroad to produce. Remember that until a few years ago China had to import the tips for ballpoint pens.
Well here except for the labor costs, raw material and machinery costs will increases.
Earlier need to pay less but need to pay more due to devaluation. So it reduces profits and there by investments and capital expenditure.
That's the reason trade war is reverberated across globe especially in raw material and component countries like Australia, Germany, France, Japan and Korea.
This will bring down a global slow down not specific to China and USA. Since Global trade is always multi-lateral and impact can't be gauged completely.
Moreover investments are driven by perception and this lower profits and growth outlook will dampen the overall sentiments.
Earlier need to pay less but need to pay more due to devaluation. So it reduces profits and there by investments and capital expenditure.
That's the reason trade war is reverberated across globe especially in raw material and component countries like Australia, Germany, France, Japan and Korea.
This will bring down a global slow down not specific to China and USA. Since Global trade is always multi-lateral and impact can't be gauged completely.
Moreover investments are driven by perception and this lower profits and growth outlook will dampen the overall sentiments.
Sure but there's all the US tariffs which artificially increased the prices in the first place. Furthermore there's the inflationary effect of the currency devaluation. China imports lots of raw materials for manufacturing as well as food and energy. So your costs to making that plate are increasing and the wages you pay your workers isn't worth as much as it used to be. Yuan devaluation effectively takes wealth from all Chinese and puts it into the hands of Chinese exporters.
What's to stop a question?
That depends on how you write your contract.
FOB or CIF? CFR perhaps. And what plates? Trade finance? Company finance? LOC? Volume of plates, consistency, mass, packing material, details on delivery?
Trade shipping contracts do go into 50 pages for a reason.
That depends on how you write your contract.
FOB or CIF? CFR perhaps. And what plates? Trade finance? Company finance? LOC? Volume of plates, consistency, mass, packing material, details on delivery?
Trade shipping contracts do go into 50 pages for a reason.
The idea is that the cheaper effective prices encourages foreign buyers to buy more, generating more economic activity. Of course it also makes imports more expensive but if the country is a net exporter, the net effect is positive for them.
From what I understand, nothing stops that from happening really. Though if a company is selling both to the US and to somewhere else that doesn't use the dollar, the cost increase may end up damaging business elsewhere. Giving the US customer a price hike and not others is also likely to damage business relations, so generally it seems that it's safer and less complicated to keep the price the same and just sell more units.
> Though if a company is selling both to the US and to somewhere else that doesn't use the dollar, the cost increase may end up damaging business elsewhere.
Unless the "somewhere else" uses the yuan, currency devaluation doesn't work that way. Even if the exchange rate is tied to the dollar by fiat, devaluing it does so against all other currencies, because nobody is going to accept less yuan for their euros than they could get by exchanging euros for dollars and then dollars for yuan.
But that still doesn't mean they can raise prices, because the whole point of the currency devaluation is to make them more competitive. Raising prices does the opposite. And you can't claim the whole thing as margin if that would have caused you to lose the contract to begin with, which was the original reason for the currency devaluation. You may also have to compete with other local suppliers who are operating under the same nominal reduction in local costs.
Unless the "somewhere else" uses the yuan, currency devaluation doesn't work that way. Even if the exchange rate is tied to the dollar by fiat, devaluing it does so against all other currencies, because nobody is going to accept less yuan for their euros than they could get by exchanging euros for dollars and then dollars for yuan.
But that still doesn't mean they can raise prices, because the whole point of the currency devaluation is to make them more competitive. Raising prices does the opposite. And you can't claim the whole thing as margin if that would have caused you to lose the contract to begin with, which was the original reason for the currency devaluation. You may also have to compete with other local suppliers who are operating under the same nominal reduction in local costs.
> Even if the exchange rate is tied to the dollar by fiat, devaluing it does so against all other currencies, because nobody is going to accept less yuan for their euros than they could get by exchanging euros for dollars and then dollars for yuan.
Depends on the fees at each hop. A small fee could eat up the whole arbitration opportunity for our hypothetical EU or US buyer.
Depends on the fees at each hop. A small fee could eat up the whole arbitration opportunity for our hypothetical EU or US buyer.
Except that nobody actually does it that way because the fact that they (including large players that don't pay anyone commissions) could do it just increases the number of yuan anyone can get for a euro.
Well it subsidies exporters and debtors (unless your debt is in foreign currency) while punishing importers and savers
Does this strategy still work in a world with highest possibility of migration we ever had? If I live in a consumption repressed country and can see through the internet that the consumption rate is much better in other countries, I will also use my talent and resources to move to that country.
Since I can build a network online, since I can investigate laws online, even of other countries, since I can book and prepay for different steps to take in migration I have a much easier time than ever before to simply go somewhere else.
At the same time the psychological bonding between people and nations is lower than ever since the creation of nation states. If someone tells you they live at 20% the value they would want to live, just because they want to support their country, you would laugh about them.
And last but not least, more and more succeeding in the competition of production talent and creativity is more important than anything else. E.g. a soldier with low IQ and lots of muscles might have been great 500 years ago. But nowadays he simply gets shredded by a drone that was constructed by a nerd with technical talents and zero muscles.
Altogether it doesn't seem very logical to me that such a move can really improve China's situation, if it makes them lose talent quicker.
Since I can build a network online, since I can investigate laws online, even of other countries, since I can book and prepay for different steps to take in migration I have a much easier time than ever before to simply go somewhere else.
At the same time the psychological bonding between people and nations is lower than ever since the creation of nation states. If someone tells you they live at 20% the value they would want to live, just because they want to support their country, you would laugh about them.
And last but not least, more and more succeeding in the competition of production talent and creativity is more important than anything else. E.g. a soldier with low IQ and lots of muscles might have been great 500 years ago. But nowadays he simply gets shredded by a drone that was constructed by a nerd with technical talents and zero muscles.
Altogether it doesn't seem very logical to me that such a move can really improve China's situation, if it makes them lose talent quicker.
Electric vehicles are still in nascent stage;
https://twitter.com/spectatorindex/status/112909164662727475...
Till then everyday China need 504 million US$ to buy 8,400,000 bbl/day OPEC Oil to drive its economy; https://en.m.wikipedia.org/wiki/List_of_countries_by_oil_imp... and https://en.m.wikipedia.org/wiki/Petrocurrency#Currencies_use...
Hence China is selling/exporting its products/services to USA to EARN that $504 million/day; https://twitter.com/spectatorindex/status/116150270980923801...
Till then everyday China need 504 million US$ to buy 8,400,000 bbl/day OPEC Oil to drive its economy; https://en.m.wikipedia.org/wiki/List_of_countries_by_oil_imp... and https://en.m.wikipedia.org/wiki/Petrocurrency#Currencies_use...
Hence China is selling/exporting its products/services to USA to EARN that $504 million/day; https://twitter.com/spectatorindex/status/116150270980923801...
I still can't wrap my head around this topic after reading the article.
>> Yuan is not able to escape China, and therefore while other countries might see capital flee the country long before the point China has reached. China has been able to prevent a collapse of its currency.
Why would Yuan escape China and why is it a bad thing for its currency?
>> Yuan is not able to escape China, and therefore while other countries might see capital flee the country long before the point China has reached. China has been able to prevent a collapse of its currency.
Why would Yuan escape China and why is it a bad thing for its currency?
China has strict capital controls to prevent money from leaving the country.
If people believe that China is going to substantially devalue their currency, the will try to pull money out of the country and invest it elsewhere.
The risk is that the currency would then devalue more than China wants - to the point that they have very high inflation
https://chinaeconomicreview.com/for-china-the-risk-of-a-seco...
If people believe that China is going to substantially devalue their currency, the will try to pull money out of the country and invest it elsewhere.
The risk is that the currency would then devalue more than China wants - to the point that they have very high inflation
https://chinaeconomicreview.com/for-china-the-risk-of-a-seco...
Chinese wealthy have been historically moving capital out of China regardless of the controls. It has been so prevalent that the newer housing development next to where I live doesn't have the number four in any of their street addresses.
Wouldn't a weakened Yuan make them want to move the wealth back, to capitalize on the new arbitrage?
Wouldn't a weakened Yuan make them want to move the wealth back, to capitalize on the new arbitrage?
What's with number 4? And, do you live in China or somewhere else where a lot of Chinese wealthy bought property?
The word for 4 and the word for death sound the same.
Capital flight exists in China because of investor fears that the Yuan is worth significantly less than it's current rate of ~7 Yuan per dollar. Consider that the Chinese Yuan m2 currency supply figures are double that of the US Dollar. So the Chinese have printed twice as many Yuan in value as there are USD. One of those currencies is the global reserve currency used in nearly all FOREX trading. The other is only used in China. I'd say they probably have a point.
> Why would Yuan escape China and why is it a bad thing for its currency?
The full quote is:
>> China has been able to maintain its system thus far, and may be able to maintain it longer than many expect, because unlike every other major economy, China has strict capital controls. Yuan is not able to escape China, and therefore while other countries might see capital flee the country long before the point China has reached. China has been able to prevent a collapse of its currency.
I think what it's talking about is people (both domestic and foreign) deciding it's a bad currency to be invested in, and trading it for better currencies. The currency is being held so out-of-whack from where market forces would naturally keep it, that if people were allowed to do that, the PRC's economy could experience significant negative effects.
I don't think they're saying the currency itself would escape, just the value it represents.
The full quote is:
>> China has been able to maintain its system thus far, and may be able to maintain it longer than many expect, because unlike every other major economy, China has strict capital controls. Yuan is not able to escape China, and therefore while other countries might see capital flee the country long before the point China has reached. China has been able to prevent a collapse of its currency.
I think what it's talking about is people (both domestic and foreign) deciding it's a bad currency to be invested in, and trading it for better currencies. The currency is being held so out-of-whack from where market forces would naturally keep it, that if people were allowed to do that, the PRC's economy could experience significant negative effects.
I don't think they're saying the currency itself would escape, just the value it represents.
> Why would Yuan escape China and why is it a bad thing for its currency?
If yuan could leave China, people could buy 7.2 of them for a dollar, then turn around and sell only six of them to the Chinese gov't and get their dollar back.
As you can see, this creates an unsustainable situation. Thus, the Chinese gov't must prevent capital flight if they want to prop up their currency value. Otherwise, arbitrage will eventually bankrupt them.
If yuan could leave China, people could buy 7.2 of them for a dollar, then turn around and sell only six of them to the Chinese gov't and get their dollar back.
As you can see, this creates an unsustainable situation. Thus, the Chinese gov't must prevent capital flight if they want to prop up their currency value. Otherwise, arbitrage will eventually bankrupt them.
This is the single biggest mistake every single emerging market has made in the past. Overleveraging on dollars.
These countries need to realize that being in debt to a foreign currency is never worth it. The short-term booming economy because of a market flooded with dollars doesn't ever outweigh long-term costs.
See: Argentina, Brazil
These countries need to realize that being in debt to a foreign currency is never worth it. The short-term booming economy because of a market flooded with dollars doesn't ever outweigh long-term costs.
See: Argentina, Brazil
Many emerging markets don’t have enough capital to invest in infrastructure and businesses in order to build there economies. When done responsibly it’s a way to grow your economy.
Something that I have been wondering about for a long time. Why is it considered to be a good thing to export more?
It seems to me that if a country imports more than it exports, it is getting a good deal. It exports stuff and gets more stuff in return.
It seems to me that if a country imports more than it exports, it is getting a good deal. It exports stuff and gets more stuff in return.
exporting more means you're earning relatively more money that can then be spent on assets. All spending is either on assets (property, equities, land, etc) or liabilities (cars, toys, clothes, etc). Assets are the key to wealth because assets make more money whereas liabilities cost you to loose money. Wealth begets more wealth because it grows based on compounding effects.
This makes sense for individuals, but how does this work for countries?
Let's say the US were to export more stuff to China. Now American companies have more money to buy assets. If they use this money to buy assets in the US it would just cause inflation. The land prices go up, but the total amount of land owned stays the same. If they use the money to buy land in China, I am not sure that it would have much impact on the US economy.
Let's say the US were to export more stuff to China. Now American companies have more money to buy assets. If they use this money to buy assets in the US it would just cause inflation. The land prices go up, but the total amount of land owned stays the same. If they use the money to buy land in China, I am not sure that it would have much impact on the US economy.
As long as you're doing this without incurring debt, then maybe.
Financial tools such as devaluing their currency as a tool in maintaining a non-reciprocal trading relationship demonstrates the challenges in working with China. If your marital partner or friend did the same you would probably be unhappy with them. For instance, giving you equal conditions in my market assume that you will do the same in yours and that you will not unfairly subsidize your businesses through market restrictions as well as financial instruments such as currency manipulation.
> Firstly, China has devalued the yuan to offset the rising tariffs that the United States has been imposing. In fact, China has devalued the yuan significantly since the Trump administration first placed a 10% tariff on Chinese goods – effectively negating the tariffs. And with the new 10% tariffs that Trump has promised to imposed on a wider range of goods China has in response devalued their currency further.
I keep seeing claims that China is devaluing without numbers or context.
Here's a 10-year chart of the USD/CNY exchange rate:
https://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y
At the start of the current administration (Jan 2017), the rate stood at about 6.96. Today it stands at 7.04.
In the two years after the 2016 election (April 2018), the yuan had strengthened to 6.28.
According to this timeline, the first round of US tariffs hit on April 7, 2017.
https://www.reuters.com/article/us-usa-trade-china-timeline/...
From the announcement of the first round of tariffs, the yuan actually strengthened. It has only "weakened" in the last year, and then only back to a level that slightly exceeds that of Jan 2016.
Yet to hear the president and others tell it, China is on a currency devaluation bender the likes of which the world has never seen. Well, I'm not seeing it at least.
It seems that the 7.0 level was broadly seen as a line in the sand. But like all psychological levels, they rarely mean anything in the long term.
The trend is clearly for more yuan weakness based on the chart alone. Perhaps we'll even see even massive devaluation.
But so far that's just speculation. The chart tells a story of a massive bowl formation (strongest yuan point in Jan 2014) hinting at severe weakness ahead, but we're nowhere close to that at the moment.
I keep seeing claims that China is devaluing without numbers or context.
Here's a 10-year chart of the USD/CNY exchange rate:
https://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y
At the start of the current administration (Jan 2017), the rate stood at about 6.96. Today it stands at 7.04.
In the two years after the 2016 election (April 2018), the yuan had strengthened to 6.28.
According to this timeline, the first round of US tariffs hit on April 7, 2017.
https://www.reuters.com/article/us-usa-trade-china-timeline/...
From the announcement of the first round of tariffs, the yuan actually strengthened. It has only "weakened" in the last year, and then only back to a level that slightly exceeds that of Jan 2016.
Yet to hear the president and others tell it, China is on a currency devaluation bender the likes of which the world has never seen. Well, I'm not seeing it at least.
It seems that the 7.0 level was broadly seen as a line in the sand. But like all psychological levels, they rarely mean anything in the long term.
The trend is clearly for more yuan weakness based on the chart alone. Perhaps we'll even see even massive devaluation.
But so far that's just speculation. The chart tells a story of a massive bowl formation (strongest yuan point in Jan 2014) hinting at severe weakness ahead, but we're nowhere close to that at the moment.
"China bids up the price of the dollar relative to the yuan by buying dollars with yuan, and then sits on these dollars by purchasing U.S. treasuries with them"
Is China printing yuan to buy dollars? I thought the USD was accumulated from payments (in dollars) from exports to the USA.
Is China printing yuan to buy dollars? I thought the USD was accumulated from payments (in dollars) from exports to the USA.
I see a lot of comments looking at this from a 'X vs Y' lens and are trying to paint China/USA/Trump/Whoever as a bully, victim, or some other emotional label. In this kind of situation, I think it is important to remember that there are not any 'bullies' and 'victims'
Like most business, the rules of engagement are flexible dependent on those involved and their willingness to assume risk to gain a nominal advantage. Also like most businesses, the net outcome of increasing risk is not always in favor of the party taking the risk, however the net outcome is almost always in [someone's] favor. Thus, you can simplify the outcome of any risk into two categories: Internal Advantage & External Advantage.
-- Note: I don't use the term "disadvantage" as I prefer to force myself to think of things from a advantage/standing perspective. Any loss on a countries' part is a direct result of another country gaining some relative advantage. "What is the inherent risk with Action [X], and who gains from it?"
Now regarding the issue at hand, the recent moves between China & the United States:
China is responding to the United States assuming a greater degree of risk, and corresponding reward, through recent tariff changes.
They appear to be trying to mitigate the advantage the United States gained by their actions, and thus are responding as any rational party in this situation would by attempting to regain their original advantage. The value of the currencies is, while non-trivial from a macro-perspective, a non-issue compared to re-establishing a status quo of commerce volume and relative economic position.
The question that remains now is whether the net advantages of either nation shifts as a result of this recent exchange.
Like most business, the rules of engagement are flexible dependent on those involved and their willingness to assume risk to gain a nominal advantage. Also like most businesses, the net outcome of increasing risk is not always in favor of the party taking the risk, however the net outcome is almost always in [someone's] favor. Thus, you can simplify the outcome of any risk into two categories: Internal Advantage & External Advantage.
-- Note: I don't use the term "disadvantage" as I prefer to force myself to think of things from a advantage/standing perspective. Any loss on a countries' part is a direct result of another country gaining some relative advantage. "What is the inherent risk with Action [X], and who gains from it?"
Now regarding the issue at hand, the recent moves between China & the United States:
China is responding to the United States assuming a greater degree of risk, and corresponding reward, through recent tariff changes.
They appear to be trying to mitigate the advantage the United States gained by their actions, and thus are responding as any rational party in this situation would by attempting to regain their original advantage. The value of the currencies is, while non-trivial from a macro-perspective, a non-issue compared to re-establishing a status quo of commerce volume and relative economic position.
The question that remains now is whether the net advantages of either nation shifts as a result of this recent exchange.
«…an undervalued currency, by raising the cost of imports, acts as a kind of consumption tax for household and so reduces disposable household income. With lower disposable household income usually comes lower household consumption…the combination of lower consumption and higher production automatically causes a surge in the savings rate.
And of course, this also acts as a subsidy to consumption for other countries whose currencies can now purchase additional imports.»
The first paragraph is written by Michael Petteis. The second paragraph by the blog's author. That second paragraph is completely wrong. As Michael explains, an undervalued currency raises the cost of imports. Therefore it doesn't help "purchase additional imports".
And of course, this also acts as a subsidy to consumption for other countries whose currencies can now purchase additional imports.»
The first paragraph is written by Michael Petteis. The second paragraph by the blog's author. That second paragraph is completely wrong. As Michael explains, an undervalued currency raises the cost of imports. Therefore it doesn't help "purchase additional imports".
An undervalued currency raises the cost of imports into the country whose currency is undervalued.
For other countries, it subsidizes imports from the country with the undervalued currency.
He's not claiming that an undervalued currency helps that country purchase additional imports.
For other countries, it subsidizes imports from the country with the undervalued currency.
He's not claiming that an undervalued currency helps that country purchase additional imports.
Ah I see, this makes sense. Thanks. I misunderstood the second paragraph.
no mention of how devaluing the currency affects or is affected by the interest rate. china is lowering interest rates...
china's interest rate is still higher than than the us feds.
https://www.cnn.com/2019/08/19/investing/china-interest-rate...
china's interest rate is still higher than than the us feds.
https://www.cnn.com/2019/08/19/investing/china-interest-rate...
Excellent article. I wonder how this news will affect those worried about the inverted yield curve?
Not a single word about OPEC Oil in this article :(
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Both Donald Trump and Elizabeth Warren want the dollar to be weaker because, as we will see, a weaker currency will boost exports.
So, is this one way to summarize it: The lowlier a country's populace is on the world stage, the better the balance of trade, and the more the country's elites benefit? Of course, this isn't true 100% across the board. Make a country's economy backwards enough, and its businesses will lose the ability to compete in high margin value add goods.
So, is this one way to summarize it: The lowlier a country's populace is on the world stage, the better the balance of trade, and the more the country's elites benefit? Of course, this isn't true 100% across the board. Make a country's economy backwards enough, and its businesses will lose the ability to compete in high margin value add goods.
*rolls eyes.
To look at whether or not the yuan is being devalued stop looking at it vs just the dollar but against all other currencies. The trade war is pushing up the dollar significantly.
Today's value vs Aug 19th 2018.
Yuan vs Euro 0.13 vs 0.13
Yuan vs Pound sterling 0.11 vs 0.12
Yuan vs Yen 15.11 vs 16.06
Yuan vs Indian Rupee 10.15 vs 10.14
TLDR: Yuan is basically the same, rather it's the dollar that's gaining.
To look at whether or not the yuan is being devalued stop looking at it vs just the dollar but against all other currencies. The trade war is pushing up the dollar significantly.
Today's value vs Aug 19th 2018.
Yuan vs Euro 0.13 vs 0.13
Yuan vs Pound sterling 0.11 vs 0.12
Yuan vs Yen 15.11 vs 16.06
Yuan vs Indian Rupee 10.15 vs 10.14
TLDR: Yuan is basically the same, rather it's the dollar that's gaining.
> against all other currencies
The correct method is a trade-weighted basket of currencies. So if you trade 90% with India and 10% with Japan, you weight the moves accordingly.
By this method, the renmimbi has devalued. Just not by as much as it appears by just watching the dollar.
More critically, the Chinese government fixes the renmimbi-dollar trading range. This gives this pair (among others) special status over others.
The correct method is a trade-weighted basket of currencies. So if you trade 90% with India and 10% with Japan, you weight the moves accordingly.
By this method, the renmimbi has devalued. Just not by as much as it appears by just watching the dollar.
More critically, the Chinese government fixes the renmimbi-dollar trading range. This gives this pair (among others) special status over others.
There are a number of measures. Looking at a chart you can see the trend yourself instead of taking it from OP.
https://imgur.com/a/5sZRJbW
https://imgur.com/a/5sZRJbW
REER is a domestically-scoped tool. It answers “should the currency move,” not “has it been pushed?”
Re: China devalued their currency to offset the U.S. tariffs. But China is between a rock and a hard place. Tariffs risk severe damage to their fragile economy if not offset with currency devaluation. But, with the enormous debt burden the Chinese are now under, currency devaluation creates the real risk of capital flight from the country - and makes it more difficult for China to service it’s dollar denominated debt.
Trump knows that China is in a weaker position than the US. However, all this gamesmanship (and gameswomanship) risks crashing both economies (and the world economy). Trump is willing to play chicken as long as the US has the edge. But chicken is still a risky game. An interesting economic experiment is underway. Unfortunately, we are the lab rats.
Trump knows that China is in a weaker position than the US. However, all this gamesmanship (and gameswomanship) risks crashing both economies (and the world economy). Trump is willing to play chicken as long as the US has the edge. But chicken is still a risky game. An interesting economic experiment is underway. Unfortunately, we are the lab rats.
The interesting thing here is that the case is made that China can (and does) manipulate its currency and that devaluing one's currency is what has led to the shift of manufacturing jobs from the developed world to China (and other places) but it also notes that this suppression of currency value is becoming increasingly difficult.
Doesn't this support the argument that currency manipulation is ultimately time limited?
On a side note, I always like to point people to this [1] on the subject of free trade, specifically the conflation between free trade and free movement of capital.
[1] http://economixcomix.com/home/tpp/