China will cave on the Yuan to GWB just as China caved on returning our EP-3 and crew.
Posted on 05/17/2005 6:34:45 PM PDT by familyop
NEW YORK - The Bush administration has put China on notice that it expects a revaluation of the yuan within six months.
In its biannual report to Congress on exchange rates and trade, the U.S. Treasury said China will be at risk of being accused of unfairly manipulating its exchange rate if it doesn't act swiftly to abandon its fixed exchange rate against the dollar.
For the past ten years, the yuan has been pegged to trade in a narrow band around $8.28. Beijing has repeatedly said it will widen the band, making the yuan more flexible in time, but the head of China's central bank denied again last week that a revaluation was imminent.
The Treasury report can be seen as the administration's response to a bill put forward by Senator Charles Schumer, D-N.Y., that would impose heavy sanctions if China does not revalue in the next six months.
The report and a statement from U.S. Treasury Secretary John Snow played a major role in turning around U.S. stocks Tuesday afternoon after they had been hammered on inflation fears when strong Producer Price Index and monthly housing starts numbers were posted before trading began. The Dow Jones Industrial Average posted a second straight day of gains--rising 79.59 points to 10,331.88.
The Treasury report makes clear that China would meet the requirements of being named a currency manipulator if there is no substantial change in its currency regime within six months.
"It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions," the Treasury report says.
"It is critical that we address the issues of imbalances aggressively," said Snow's statement. "China's rigid currency regime has become highly distortionary. It poses risks to the health of the Chinese economy, such as sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows and overinvestment," he added.
The Treasury is now saying that China should take an immediate transitionary step towards a full float of its currency, but that Beijing doesn't need to move immediately to a full floating rate regime. This could be as straightforward as a significant widening of the yuan's trading band.
U.S. Congressmen and U.S. export manufactures would welcome an immediate signal of intent to allay their concerns about the U.S. trade deficit with China which they argue is being increased by what they say is China's artificially cheap currency.
China's bilateral trade surplus with the U.S. expanded in the second half of 2004 to $93.5 billion, compared to $70.2 billion in the same period the previous year.
China's global current account surplus had increased to $40 billion in the second half of last year, or 4.2% of gross domestic product--roughly twice as large as the surplus in the second half of 2003.
Though China has already been working on financial market deregulation for two years, preparing to loosen the yuan's peg to the dollar, and has gradually sought to give its financial institutions more experience operating in foreign exchange markets. China's capital markets would require substantial further liberalization to sustain the impact of a fully free float.
Further interest-rate liberalization is also crucial. If the central bank loses its exchange-rate control over monetary policy, it needs to be able to affect either of the only two alternative policy tools: a target interest rate or a target inflation rate, and targeting the latter is impractical.
Earlier this month, Vice Finance Minister Li Yong told the annual meeting of the Asian Development Bank meeting that China had to first get its market mechanisms in order and repair its corruption-ridden and bad-debt burdened banking system.
Many in Congress have been critical of the administration softly jawboning the Chinese authorities over the issue of the yuan. But the administration has been reluctant to take a more forceful approach, in public at least, for fear that the Chinese authorities won't want to be seen within China as bowing to foreign pressure, and particularly not American and Japanese pressure. (Tokyo has made similar calls for revaluation.)
Note that the Treasury report is diplomatically couched in the language of global economic imbalances rather than the bilateral U.S.-China relationship,
"The fixed exchange rate China now maintains is a substantial distortion to world markets, blocking the price mechanism and impeding adjustment of international balances. It is also a source of large and increasing risk to the Chinese economy," the report concludes.
We do agree.
...just in from Sydney, where it is morning.
Forex - US dollar mixed Sydney morning after falling on benign ...
http://www.forbes.com/business/feeds/afx/2005/05/18/afx2038880.html
Forbes - 43 minutes ago
"SYDNEY (AFX) - The US dollar was trading mixed against major currencies, searching for direction after being hit by a benign US inflation report for April ... "
When I posted to you the DCX was up 10. The big picture: It has momentum. I don't like to step in front of freight trains even if they slow down occasionally. The dollar has made a classic triple bottom and has broken through all the long term trend work to the upside. Why? I have no idea. Everybody else has an opinion though. I expect, as usual, we'll find out soon enough.
China will cave on the Yuan to GWB just as China caved on returning our EP-3 and crew.
Quote: China will cave on the Yuan to GWB just as China caved on returning our EP-3 and crew.
LOL They caved( as you call it) only after thourghly dissaaembling the plane and getting all the info they could out of it.
You missed the analogy. Just as China returned our EP-3 in pieces, so too will they revalue their Yuan, piecemeal.
OMG LOL
Do you recall what happened during this period?
Here is the annual Manufacturing percentage of Total Gross Output for our country.
1998: 24.18%
1999: 23.53%
2000: 22.79%
2001: 21.17%
2002: 20.37%
2003: 19.84%
Manufacturing declined as a percentage in each year. 9/11 without a doubt exacerbated the trend already in place. It did not however, initiate the trend.
Percentages do help weed out raw numbers enhanced by money growth and inflation. Without a doubt, gross manufacturing output has risen. But the portion it has contributed to overall gross output is shrinking. What has contributed a growing portion to the total gross output the last few years ? Real Estate, Services, and Government. Manufacturing produces wealth for our nation. The shrinking portion of our economy it represents is disconcerting.
Our imports from china went from approxiamtely $152 billion in 2003 to 197 billion in 2004.
The rise of 45 billion in imports from 2003/2004 is more than we sell to china which was something like 34 billion in 2004.
That is telling abour our loss of manufacturing and which way it is trending.
When I was growing up, a friend's father was a janitor, his mother, with the exception of seasonal work in the local cannery, stayed home. Still they were able to lead a very solid, but not extravagant, middle class life. They owned their own home and a couple of acres where they built a vacation home. They had a car and a truck and health insurance. The point isn't that people lack ambition, not everyone is cut out for an MBA, or that ag jobs are not good enough. The point is that these jobs no longer pay enough for present day workers to take care of their families.
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