Beijing Move Threatens to Shake Up Its Neighbors

While all eyes will be trained on the Chinese yuan in coming days, China's decision to drop its currency peg and allow its currency to gradually rise is likely cause bigger reverberations in the rest of Asia.

Analysts are looking for big gains in currencies such as the South Korean won, Singapore dollar, Thai baht and Malaysian ringgit. The reason: they are proxies for China's growth and they're economic competitors which can now let their currencies rise as well.

"It's possible the bigger currency moves will be in the rest of Asia, not in China," says Robert Subbaraman, economist for Nomura in Hong Kong.

In early Asian trading, the Australian dollar gained 1 cent to 87.97 U.S. cents. Australia's huge commodity exports to China make it another proxy for the country's economy. The New Zealand dollar also rose.

The euro rallied, getting what analysts say may be a short-term boost from investors' attraction to riskier assets. The euro was trading at $1.2414 in Asia from $1.2374 in New York on Friday.

But many say that the ripples from China's move could spell more bad news over the medium term for the common currency.

China at the weekend said it plans to make its exchange rate more flexible after pegging it to the dollar for almost two years. The statement, released ahead of a summit of the Group of 20 major economies in Toronto, gave no details about the timing or pace of any moves.

Don’t know the full extent of the effects, but the reason they did this would partially because they believe there will soon be a torrent of dollars; the reason why the dollar was once tied to gold was because the gold supply is not easily manipulated (man can’t turn lead into gold).

Similarly, the yuan was tied to the dollar because the Chinese view until now has been that the USA would not inflate the supply of dollars, ad libitum.

But for WHATEVER REASON the PRC now thinks that the supply of dollars will NOT be limited —that it might be something more like UN limited, i.e. bailouts for one and all.

So we have an interesting situation here; commies saying that it views the USA as financially NUTS.

As I understand it, the American debt to China expressed in treasury bills and notes is denominated in dollars. Therefore, until the Chinese decouple they will receive back as good as they gave us far as the value of the currency is concerned. But now they have begun the process of decoupling and they run a serious risk of being paid back depreciated dollars which will buy far fewer yuans. The question is, why would they court this risk?

The most likely explanation is that the Chinese expect the American dollar to devalue and if they remain coupled to a depreciating currency, they run the risk of inflating their own economy at a time when the prospect of inflation presents a real and present danger to an overheated Chinese economy, an economy overheated especially in the real estate sector. Thus, the move could be seen as a defensive move to prevent their economy from being swept into inflation by the American dollar as it depreciates.

It may be the Chinese were further moved to decouple as a means of bringing their own inflation concerns in hand. That is, they are inclined to let the growing buying power of the yuan act as a market force to dampen inflation expectations.

Or, it may be that the Chinese were motivated because they believe that they can become the reserve currency of the world as their manufacturing production surpasses that of the United States next year. If they become the reserve currency of the world, their insatiable hunger for the commodities of the world will be cheaper if they are paid for in valuable yuans rather than with depreciated dollar equivalent yuans.

It might mean that the Chinese have despaired of the Americans getting their fiscal house in order and they are determined not to go down with the American ship. It might be a geopolitical muscle flexing exercise in which they want to extend their political, military as well as economic power, into the region of Asia, into Africa and South America, and even beyond.

It might simply be that the Chinese think they have come of age. I wish that I could access the rest of the Wall Street Journal article to learn more. The Chinese might believe that their own domestic market has become large enough to sustain their own economy even though it is likely that they will sell fewer goods into the American market as they become relatively more expensive for a weakened dollar. In short, the Chinese are willing to accept a shrinkage in the American market for the options the decoupling gives them. Besides, they might well have considered that the reduction in buying power by the Americans is inevitable anyway given the shape of the American fiscal structure. They want to have an independent basis for survival when America goes down.

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