Thursday, July 21, 2005

China Abandons the Dollar

Ouch. I don't fully understand the economics of international currency exchange, but I can't see how this is a good thing, as it seems on the face of it to show a lack of faith in the dollar's strength.

I see that this uptick was lobbied for by the US and others, and isn't what those parties wanted, but that Treasuries have fallen in response. The key, I ascertain, is whether China will keep buying our debt.

Anyone who has more knowledge, please comment.

3 Thoughts:

Blogger pawlr said...

Impacts:

- Large retailers in the U.S. will have to raise prices; unfortunately this won't cause more competition because Walmart has run all competitors out of small communities all over the U.S. Inflation will result in the retail sector.

- It will take a long time for the Chinese population to be a valid consumer of U.S. services so I don't anticipate an uptick in U.S. exports.

- The Yuan will not drastically jump in value since its still tied to a cluster of asian currencies and only allowed to rise very fractionally each day.

Anyone else have any insights?

Thursday, July 21, 2005 1:51:00 PM  
Blogger Demotiki said...

In reality, the appreciated Yuan will have little or no effect. Paul is correct in theory, but you also have to realize that percapita productivity increases in China will lower the price of manufactured goods at least as fast as the Yuan inceases them.

The Chinese population is unlikely to demand US services with our without the rise in the Yuan. What kinds of services did you have in mind Paul?

I didn't follow this item closely, but I think the Chinese only raised the value 2.1%. That's not a whole lot. When I was in Benin they devalued the CFA by 50% and the world kept spinning, although imports skyrocketed.

China's top goal is to keep employment high and to keep accumulating dollars. The wage market in China is such that even substantial increases in the value of the Yuan will not result in wage inflation (the goods consumed by workers are locally produced). Given this reality, changes in the price of oil and other inputs will have a much larger impact on the cost of Chinese goods in America than a small rise the Yuan's value.

Thursday, July 21, 2005 8:01:00 PM  
Blogger Doug said...

A nice summary here, including the likely effect on the US budget defecit and possible increased risk of a devalued dollar.

Friday, July 22, 2005 12:22:00 AM  

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