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May 21, 2005

Currency Manipulation?

Suddenly we are hearing talk of Chinese manipulation of their currency. I think the hype is preposterous, and I am hoping that I can get a straight story.

What I know is that China has refused, for decades, to let its currency float against the Dollar. The value of the Yuan is basically pegged to the dollar. The exchange rate never changes. No matter where the American dollar goes relative to other currencies (clear enough?). Suddenly, this has been called 'manipulation'. Why? because some politicians tied to the American textile industry are crying foul about recent trade agreements that allow more Chinese clothing to come to the US. They want the Chinese Yuan to appreciate to the point at which the price of a t-shirt from China makes consumers buy American? Fat chance. I don't know about you, but I have no idea where my clothing comes from. The status of American clothing comes 98.5% from the brand of the store you buy it from, not the country of its manufacture or origin.

Already, the Chinese have increased internal tarriffs on textile products to be exported to the US in response to American pressure. That suits Chinese officials just fine. They line their pockets with that tax and Americans still buy more cheap products. What are we talking about? A dollar?

Here's something else I know. Chinese cotton and silk are the raw materials that are shipped outside of China, mostly to Nigeria and other West African countries, to be made into fabric and dyed. The fabric is then shipped back to China and sewn into clothing. So anybody concerned should understand that China is not single-handedly undermining free trade, but that they already are a player in a global market. It's not just China involved in 'Chinese' textiles.

It seems to me that the net result of floating the Chinese currency is going to be felt in a huge number of other ways and that the political pressure brought to bear for the sake of the trade deficity will have unintended consequences elsewhere. The trade deficit isn't the only consideration here, but the billions in Treasury bonds held by the Chinese. Already the (NPR) news on this story makes it sound as if something inevitably has to happen soon and that the Congressional rumblings on this matter must be attended.

How shortsighted can we be? For t-shirts.

Posted by mbowen at May 21, 2005 11:23 AM

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Cobb, I respectfully disagree and think you are totally missing the point. it's not about raw materials and goods. Its about the Chinese purposely pegging thier currency to ours, making their products cheap in the United States. The huge trade imbalance this causes is bad for our country long term. Most major industralized nations let their currency float freely in the market, why should the chinese be given free reign to cheat and have an unfair advantage over other industrialized nations? Why should Americans indirectly subsidize the chinese economy? If china wants to be a member of the WTO, which they do desperately, let them play fair.

Posted by: New Leadership at May 21, 2005 02:49 PM

The Chinese pegged their currency to the US dollar in 1994. Suddenly it's an issue?

Posted by: Cobb [TypeKey Profile Page] at May 21, 2005 03:42 PM

Yes it is an issue now. If I remember correctly, 1994 was around the begining of their "capitalism experiment." I don't know the precise numbers, but i'm sure their econonmy has doubled or tripled with their GDP averaging 7% to 10% a year since then. I think you're comparing apples to oranges trying to compare the 1994 Chinese economy to todays.

Posted by: New Leadership at May 21, 2005 04:15 PM

Ok guy, it's been a while since I last studied international currency policies, but pegging a currency to the US$ will not cause a trade imbalance nor will it necessarily be bad for our economy. A foreign currency being pegged to the US$ will help support the US$ dollar (this is a big plus). Think of this as the stock market, except it is the green back. Wouldn’t it be nice if there was someone out-there stepping in to buy your stock when the price falls to make sure it stays at a certain level? Now I know this is a very over simplification but I just wanted to make a point. If the US$ rises relative to the Yaun or whatever their currency is called they will increase their US$ currency to increase the Yaun to the US$. This in turn will increase US$ world demand and the price of the dollar (strong dollar), hence a bigger bang for your buck in the international market. Don't get me wrong China has issues and they do not participate in free trade (this is the true problem). Their government subsidizes their companies through tariffs and that is wrong, this is what causes the trade imbalance. The main point I wanted to make is that this is not a simple discussion. Nor is the current international currency policy truly efficient. Unfortunately we abandoned the gold standard, so this is what we have for now.

Posted by: Tito at May 22, 2005 10:27 PM