Posted on 01/26/2005 12:59:33 PM PST by dilbert80
Economist: China Loses in Dollar Stability Wednesday January 26, 3:47 pm ET By Edith M. Lederer, Associated Press Writer China Has Lost Faith in Stability of U.S. Dollar, Top Chinese Economist Says at World Forum
DAVOS, Switzerland (AP) -- China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum. At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."
But he stressed that the Chinese government is under no pressure to revalue its currency.
China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to $1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency.
"The U.S. dollar is no longer -- in our opinion is no longer -- (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English.
"So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars -- those kind of more diversified systems," he said.
"If you do this, in the beginning you have some kind of initial shock," Fan said. "You have to deal with some devaluation pressures."
The dollar hit a new low in December against the euro and has been falling against other major currencies on concerns about the ever-growing U.S. trade and budget deficits.
The U.S. currency came under some pressure Wednesday, drifting lower versus most currencies including the Japanese yen and the euro, as dealers mulled the Chinese official's statements.
Fan said last year China lost a good opportunity to do revalue its currency, in July and October.
"High pressure, we don't do it. When the pressure's gone, we forgot," Fan said, to laughter from the audience. "But this time, I think Chinese authorities will not forget it. Now people understand the U.S. dollar will not stop devaluating."
Asked how speculation about revaluation could be curbed, he noted that China imposed a 3 percent tariff on Chinese exports.
Some Chinese experts say that perhaps inflation can be reduced this year, "but I'm not that optimistic," Fan said, noting that fuel prices keep rising.
"So maybe China (will) have 4-5 percent inflation in 2005," he said.
Fan, whose nonprofit institute specializes in analyzing the Chinese economy, stressed that the country's development is a long-term process that will take decades, maybe a century.
Since China's economic modernization began over a decade ago, 120 million rural laborers have moved into cities, but another 200 million or 300 million people need to move into the cities from the countryside to spur development, he said.
"The income disparity is huge, and income disparity will stay with us for a long time, as long as those 200 to 300 million rural laborers stay in the countryside," Fan said.
Nonetheless, William Parrett, chief executive of Deloitte Touche Tohmatsu, told the panel that Chinese companies are making significant progress in becoming global giants, led by state-owned companies.
"It's probably at least 10 years before the objective of the government of 50 of the largest 500 companies in the world being Chinese" is achieved, he said.
What do you think?
WE'RE DOOMED!
Historically, fiat currencies have had finite lifetimes.
US Prices will go up but exports will go up slightly, too.
this is just BS..I heard some very good economists talking about how China aritficially undervalues the currency and cheating on trade......they are screwing with us with their currency and I hope that bill being introduced in Congress about this addresses it
Higher import prices, higher inflation, higher interest rates, higher domestic wages for most people.
In the end, not much of a change in the standard of living, just higher prices and wages.
They're going to unpeg from the dollar. It's what the administration has wanted them to do.
Good! Maybe NOW they'll break the dollar/yuan "peg" and enter the REAL economy.
Won't the EU scream when Chinese purchases of the Euro makes the EU's exports even LESS competitive...
The U.S. dollar has been deflating ever since the creation of the Federal Reserve (1913). We should consider ourselves lucky that the Chinese are just now discovering this fact.
Of course, AP has been saying that almost as long as Reuters has, yet for some unknown malfunction, we're still here.:)
Woo hoo!!!
The real economy will involve Jimmy Carter style interest rates/inflation.
Oh, and a GSE crisis at least an order of magnitude larger than the S&L crisis.
How do you figure higher domestic wages? Wages can't rise unless prices rise. Prices can't rise unless demand rises. Where will demand come from with only 13% of our labor force in manufacturing?
Another deceptive graph.
"unknown"? We're still here because China is the biggest buyer of our debt. If China should decide to invest elsewhere, who will be the next sucker to finance our big spending govt?
Time to Roll over Europe now....
Destroy their currency too !
You are correct.
China is just saving face. China has been forcing the dollar lower in order to keep its exports cheap. (China pegged the yaun to the dollar.)
This had the effect of exporting inflation to China --- a process that could not continue forever.
China will now cease its meddling, and balance will return.
It's no big thing for the US. Indeed, as the overwhelmingly major item we import is oil, it will make the price of oil drop, with the net basket of inflation (in the US) being very little.
Good. Now maybe 'Our Manufacturers' will come back home.
Who else whould China consider investing in? And if the U.S. loses the capital to invest in their economy, they're down the tubes because we're holding China up.
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