| I agree this is a political move to appease the Bush government but the Bush government policies are economically unsound. Actually dangerous. Why?
Forcing the rmb to float only makes Chinese goods more expensive in the USA. We have a trade deficit because labor intensive goods are made more cheaply in China than the USA. So now when I go to buy clothes at Walmart the clothes will become more expensive over time as the RMB increases in value. The theory that we can sell goods more readily in China is not viable. China still is very poor in the rural areas they wont be buying cars or computers anytime soon. The impact far more effects American consumers than will help american companies. China is the second largest holder of US treasury notes they will move to higher yielding assets or lose money this will actually generate higher interest rates in the US affecting consumption. If the rmb were to appreciate substantially it would create chaos in China. Companies like Walmart, nike, all the computer related companies would relocate to other countries with cheaper labor (like India) forcing many people out of work. In the short term big buyers like Walmart would force the cost increases back on their suppliers who would cut workers pay and benefits. It will only make real estate speculation worse as purchasing properties in RMB will yield greater profits from dollar investors if they see the rmb increasing in value. There is no benefit to local chinese accept higher prices. Tourism from the USA would be severely impacted as now a beer that cost 30 rmb at an 8 to 1 ratio is about 3.80 on a 4 to 1 ration would be 7.60. This reminds me back in the 1980's when Japan was the bad country with the big budget surplus taking all our money all the tariffs etc did not change a thing. The Hong Kong dollar is pegged to the us dollar and there has never been a complaint about it not floating freely. I first came to China in the early 1990's. The country was just settling down after the Tianemen Square upheavels. People literally did not want to take rmb because they had lost confidence in the stability of the country. Pegging to the dollar provides a strong measure of stability and I think that is what we would want rather than undermining a weak banking system and creating social instability. My sense is the rmb will increase in value till it equals the hong kong dollar ( this makes bookeeping alot easier) then it will not change much from there. The Chinese government is very sensitive to social unrest and wont add to it by free floating which leaves the country at the mercy of currency speculators after all Bush will be out of office in a few years. |
RMB Finally Goes Strong