Posted on 07/21/2005 4:03:13 PM PDT by RoyalsFan
CHINA gave way to mounting political, diplomatic and economic pressures yesterday by scrapping its decade-old currency peg to the dollar, revaluing the yuan and paving the way for further rises in its exchange rate. In long-awaited move, partly designed to defuse intense pressure from Washington for a rise in the super-competitive value of the yuan, China said it was switching to a complex new arrangement that linked the yuan’s value to an undisclosed basket of other world currencies.
In the sudden change, which caught markets by surprise, China said that, under its new “managed float” arrangement, the yuan would immediately be revalued against the dollar, at a level of 8.11 yuan, 2 per cent above the 8.28 level of the former peg.
The apparently modest scale of the initial move against the dollar meant that both political and market reaction yesterday was muted. The 2 per cent appreciation of the yuan against the dollar implied only a limited economic impact. Beijing also said that it would allow only a very narrow trading band, of plus or minus 0.3 per cent, against the yuan’s new dollar level.
But economists said the complicated new regime looked similar to a managed float system operated by Singapore, which had permitted a controlled rise in its currency.
Although the new system links the yuan to the dollar at an initial rate of 8.11, with only a narrow trading band around this, analysts noted that the quoted level against the dollar could now be adjusted on a daily basis. Theoretically, if Beijing allowed the yuan to rise by 0.3 per cent each day, it could gain more than 6 per cent a month.
Goldman Sachs predicted that the system would lead to a rise of up to 9 per cent against the dollar within 12 months.
But Julian Jessop, of Capital Economics, said the detailed operation of the new regime remained unclear and that “the devil may still be in the details”. He noted that a quoted rate against one currency, in this case the dollar, was not usually consistent with a currency basket, so Beijing’s exact intentions were unclear.
However, analysts said that a rising yuan could help to boost Western exports to China while slightly eroding the huge competitiveness of Chinese exports.
Beijing’s decision was hailed by John Snow, the US Treasury Secretary, Alan Greenspan, the Federal Reserve Chairman, and other international policymakers. Mr Snow said the change was extremely positive. “They’ve put in place a mechanism that provides room for significant movement over time,” he said.
The impact on a vulnerable dollar remained uncertain last night, with concerns that reduced Chinese demand for US Treasury bonds and other dollar assets could trigger a steep decline.
But the effect on the dollar was limited yesterday, except against the yen, amid market speculation that Japan may now be more comfortable with a rise in its currency. The dollar saw its biggest one-day percentage move against the yen for two years, dropping by 2.4 per cent to 110.16 yen. US Treasury bonds also tumbled as markets anticipated reduced Chinese demand, dropping by 81 cents and pushing US market interest rates higher.
The Chinese action reverberated throughout Asia, with Malaysia immediately moving to abandon its own dollar peg.
John Snow defn; American idiot.
Does anybody other than this fool think that by pegging their currency against others now in addition to ours and then calling the system a different name makes any difference?
"US Treasury bonds also tumbled"
This means interest rates went up. When you get something financially you always give up something. In this case mortgages etc will go up. It may not show up immediately but it will. As far as the deficits go, it would take a microscope to measure the difference. Now Chinese junk is going to cost the Americans more and thus dig into their descretionary income. That's called inflation.
Merriam-Webster Online Dictionary
Main Entry: in·fla·tion
2 : an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level
John Kudlow a free market conservative did warn the conservatives about this. He pointed out that the old Chinese system was a known quantity. It was in place for many years, and the US did not complain about it until recently when it hurted US exports. He pointed out that if the Chinese does not peg their currency to a fix rate to the US dollar it may unleash unforseen financial forces that we may not want. I think the Chinese has thought this one out for a long time and figure how to unpeg the yuan from the dollar which will retain their advantage and hurt the US economy. Problem is we can not complain about it, because the US was the ones that wanted it. I personally would have left the old system alone, and figure a financial strategy that will use the arrangement against the Chinese trade imbalance. That way the Chinese can not complain because it is their own rules being used against them. Right now, we face an unknown, but like the old saying goes, chaos is not necessary bad, it can represent new opportunities.
WordNet ® 1.6, © 1997 Princeton University, has a witty definition that says:
inflation 1: a general and progressive increase in prices; "in inflation everything gets more valuable except money" [syn: rising prices] [ant: deflation, disinflation]
The USD is going to go down so the above definition is more accurate. You can see the evolution of the definitions at:
http://inflationdata.com/Inflation/Articles/Definitions.asp
If you let your opponent define the issue you lose the argument.
If you accept the definition that inflation is an increase of prices you are doomed to bad economic policies.
The definition of a technical term can not change without making the term non technical.
An example in the political realm would be rights and privileges. Privileges are now rights (welfare): and rights (the 2nd amendment) are becoming privileges.
Rational discourse will come to an end with the expectance of new and better definitions
I totally agree with your assessment. One unknown is that the Chinese have been going along with us and basically doing what we've asked of them. Now that is going to change. It may be them who start telling us what to do. I'm sure that will an extreme delight when it happens.
Losing an argrument is of no concern to me. Just what is Greenspan trying to do by raising interest rates? He says he is trying to fight inflation.
I see it as a tiny start, which is better than nothing at all.
If this follows with more market openings and a real commitment to meet their WTO obligations this will mean more trade in upper end goods with the US.
As to "inflation," if it inflates to a meaningful level that just opens up a market for US domestic producers. It is basic economics. It may not lead to any depending on how they pass this on to Chinese producers. We must remember that the Yuan is not openly traded - the Chinese government - or a quite limited number of trading proxies - "trade the Yuan." This has meant that the difference between the peg value and the actual value has in part been pocketed by the ChiCom. It is a,most as though they have an internal and external currency. This put an end to that if they do it right, and it also puts pressure on some internal producers in China.
So all and all it is a good thing, provided that it is followed by more unpeggings and an eventual free float without government control trading, and an opening of internal markets. These are "knowns" in any other trading partners we have, and they will be knowns here.
The previous regime was simply unsustainable over the long haul. To believe otherwise would be akin to belief in perpetual motion machines. My personal opinion is that it dragged too long as it is, and will ultimately result in doom for both currency regimes. The more orderly the demise of the previous system, the less that the overall economy in either nation will suffer. With a bit of luck (i.e., no intervening recession for either economy), they might even be able to get things on a more sustainable track without much economic pain at all.
PS. To be clear, what I'm referring to as the "doom" of both currency regimes is an end of the respective currency management schemes in their present form.
indeed, that is what it is.
I could not have said it better myself (the thought is there, but the explanation wasn't).
ChiComs swagger to buy our companies with basically worthless currency may have been the reasoning behind this. Nobody knows the true value of the yuan, and I've read differing reports - that inflation in China due to demand on resources makes the yuan virtually worthless. A theory just like any other, but the fact remains as you stated - if they want to play in the Big Leagues (long-term), they will be forced to behave like other nations.
I'm thrilled this is finally happening.
With an unpegging we now can manage the dollar in the same way we do with sterling, the Euro or the Canadian dollar. THat is just the point. There is not some "doom" to our "currency regime."
There is in fact scarcely a "currency regime" at all in the sense that you seem to mean it. This is a fiction of financial "experts" in the MSM and various other leftist quarters. So I am mystified by what you take our currency regime to be and how you think that it is somehow deeply tied to Yuan exchange rates. The notion that one can somehow props up an 11.5 trillion dollar economy with an economy one ten the size of that is quite a fallacious one, and this would be so if we were to triple the size of the Chinese economy.
What the Tuan peg was affecting - and distorting - was trading patterns in manufactured gods, services and commodities (of course their are additional distortion due to artificialities in labor markets, trade barriers, etc.) THis in turn indirectly disorted interest rates, but not to the extent that one imagines, particularly if one takes into account historical AMerican rates (remeber, Clinton had the Prime Rate over 6 percent.)
But some sort of "doom" for some sort imagined "currexny regime" based on the Yuan/dollar peg? There is no such thing.
Either they do or they don't.
China wants it both ways, access to our markets on their terms and so far we have been willing to give it to them.
This moves them out into the open in term of market valuations.
And of course you are right, either they do or they don't. But the point is to move that out of the realm of political "promises" and into the realm of market valuations of their economy and thus their currency. This is a good step in that direction, and Bush should be lauded for getting them to blink. The trick will be to make sure that they do not get away with token gestures.
Agreed.
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