China's Currency Bow

WSJ ^ | July 22, 2005 | WSJ

[Brilliant]

China-bashing has become a favorite sport in Washington of late, both on Capitol Hill and even in the Bush Administration, so we hope that the main impact of Beijing's decision yesterday to revalue the yuan by a modest 2.1% will be to bring some of the Red-scare rhetoric, and the protectionist trade impulses it incites, to a halt.

China scrapped the yuan's 10-year-old peg to the U.S. dollar and replaced it with a tightly managed float against a basket of unspecified foreign currencies in which the dollar will no doubt still occupy a prominent place. Shortly afterward, Malaysia announced that it too was scrapping its currency's peg to the dollar and replacing it with a managed float against a currency basket.

Before we move on, allow us to say a word in praise of China's peg to the dollar. It has provided the country a decade of currency stability, and until yesterday, the yuan had not moved more than fractionally against the dollar since 1995. It gave foreign investors the confidence to build factories in China, fueling the country's export-led boom that has contributed so much to global growth in recent years. That's one reason why we have opposed moving away from a system that has served China, and the world, so well.

This tiny revaluation is unlikely to have much effect on asset allocations (Beijing has been diversifying its foreign-currency reserves for some years) -- or indeed the Chinese economy as a whole. But even a small response to the U.S. revaluation pressures is enough to cause nervousness in the markets, and Beijing's move triggered an initial sell-off of Treasury securities because of fears that China will henceforth buy less of the debt Congress is generating through overspending...

[Oldexpat]

What is interesting is that Greenspan has been trying to get the interest rates up with Fed Rate increases..and it didn't work. China devalues the dollar by 2% and the interest rates go up..guess who controls the interest rates in the US?

[o_zarkman44]

Beware of the Red Chinese economy! Beware of the Red Chinese purchasing and owning American oil companies and other property. Those key properties will become part of Red COMMUNIST China and will be subject to confiscation. Employees will be puppets for the new Red Chinese economy.
Beware of investments in Red China. Those assets, properties and businesses will be subject to confiscation on a political whim. Owners of said property will be held hostage and their peoperty held for ransom if the Red Communist Chinese decide they need to flex some muscle of control.
Anyone running to Red COMMUNIST China seeking investments and financial stability are gambling their assets worse than the most risky investments. The house rules at the RedChinaStar Casino will win every time.

[Guilliamus]

Here is another opinion from a respected and successful investment advisor:

WHO SAYS NO ONE RINGS A BELL?
by Peter Schiff
Euro Pacific Capital
July 21, 2005


The old saying “no one rings a bell,” certainly doesn’t apply today, as China rang the “mother of all bells.” So deafening was its sound, that its vibrations will be felt around the world. Nowhere will the amplitude of these waves be more pronounced than in the United States.

China’s decision to change the nature of its currency peg means that it will no longer be in the dollar buying business, or by extension, the U.S. Treasury buying business. That means that America will be losing its biggest benefactor. China will no longer act as the principal enabler of America’s irresponsible extravagance, ending its subsidies to American consumers and borrowers.

Changing the nature of the yuan peg is a first step in the ultimate direction of either allowing the Yuan to float freely or possibly pegging it to gold. In the meantime the Yuan will remain undervalued, as it will likely be pegged to a basket of other currencies using current exchange rates that clearly undervalue the Yuan. Chinese imbalances will continue to grow, along with all the domestic inflationary implications that result.

However, the pressure on China to prop up the dollar will be greatly diminished. To maintain the peg against its new basket, Chinese monetary authorities will most likely now be buyers of those other currencies likely to be included in its basket, such as the Euro or Yen. Since its reserves are already disproportionately held in dollars, it will likely rebalance those reserves to more accurately mirror the basket to which the Yuan will be pegged. Such a rebalancing will only exacerbate the dollar’s decline. However, a declining dollar will not automatically require offsetting dollar buying by the Chinese as it has during the period of the yuan-dollar peg. As long as dollar weakness is offset by strength in others currencies in its basket, the peg can be maintained.

The implications for America are enormous. Far from being the panacea that American politicians proclaim, China’s decision to alter its peg could be the pin that finally pricks America’s bubble economy. For America, the direct result of this action will be the following:

Higher consumer prices.

Higher interest rates.

Reduced profits for American companies, particularly those dependent on domestic consumption and consumer debt.

Lower stock prices, as earnings decline and multiples contract.

The busting of the housing bubble, as tighter credit standards and higher interest rates squeeze current home prices.

Rising unemployment, as higher interest rates and vanishing home equity slow consumer spending and reduce jobs dependant on that spending.

A severe recession as a result of all of the above.

Rising federal budget deficits, as recession reduces tax revenue, while higher interest rates and escalating outlays increase expenditures.

In conclusion, July 21, 2005 will be another date likely to live in infamy. This time the aggressor is China not Japan, and the bombs are purely economic. Though there will be no immediate loss of life, and no American retaliation, the financial damages will be devastating. History will remember this date as the beginning of Chinese independence, and the beginning of the end of America’s ability to depend on China.

[o_zarkman44]

America has squandered much of its wealth on "buying friends" overseas. And many American companies have taken money from America and converted it into relocation of facilities in foreign countrys. They have been baited with a promise of cheap labor and virtually no taxes. All along there has been a plan to undermine the financial and industrial might of America one company at a time.
Investors have been lured into investing in overseas funds, especially since the stock market bubble in 2001, further draining our financial wealth. I can see jobs and opportunity going away rapidly for middle class Americans. People do not realize the scope of what the drain of dollars is going to lead to. Our high rollers in government are financially secure, so why depend or trust them to make decisions that protect common American interests? As a low roller in respect to the financial wealth of America, I can see the dangers of China and foreign investments clearly. And I will be a part of those who suffer. The greed for wealth obscures clarity for those who allow these events to unfold without a fight for our sovergnity.
Thank you for the enlightening info!