China's overvalued yuan

Marketwatch ^ | 16 Nov 2010 | Lu Min

[smokingfrog]

Commentary: Looking at forex through lens of recent Chinese policy

BEIJING (Caixin Online) — Regional Asian central banks have swiftly intervened to prevent the appreciation of their currencies, fanning tensions in an already heated global currency discussion. But the use of currency depreciation to revive exports only serves to introduce greater uncertainty and puts economies on a path toward weak recovery.

The stimulation of exports to promote economic growth remains an essential pattern of growth for countries around the world. Because of this, several economies have made reciprocal moves to depreciate their currencies. And yet with so many central banks echoing similar stances, one has to ask what currencies will be spared from these measures.

But beyond this, it’s important to examine the root premise of these actions. Much has been made of China’s currency-exchange policies. At the issue’s core, I believe that the yuan should be revalued — further downward in relation to the dollar.

Firstly, let’s look at the money supply of the yuan and dollar. In last two years, China implemented a very loose monetary policy. According to quantity of money theory, the value of a currency is inversely proportional to the quantity of money in circulation. If a central bank doubles the amount of money in circulation, the unit value of the currency should be halved.

[Cringing Negativism Network]

“Caixin Online”?

No bias there, government-run Chinese state media...

Commence the trade war.

[dr_who]

Trade war? Great idea! You can never have enough unemployed people.

[krogers58]

Trade war? Great idea! You can never have enough unemployed people.

Normally, I would agree with you, however in the specific case of China, they have set about to systematically dismantle our manufacturing sector, so I'd say the trade was was begun 20 or so years ago, by China. We're just a little late to the war. It is high time we realize exactly what China is doing by subsidizing their currency, and it has the exact same effect as subsidizing their industries.

[dr_who]

Bullshit. A trade war won’t bring back manufacturing in the US. Manipulating our currency is only making the legions of people who are out of work, underemployed, or in danger of losing their job poorer by robbing their meager savings and income of value. China is also shooting itself in the foot in the long run. But it’s the height of stupidity to think that the US banking industry hotshots can continue to push interest rates through the floor and print money now after a decade and expect this strategy to weaken China now.

[zeestephen]

Arguments about the value of the yuan are pointless.

Let the yuan trade internationally, then we’ll know.

Personally, I can’t see why the price would move up.

The political risk is immense.

Almost all Chinese economic data are gathered by the Communist Party.

Do you trust their numbers?

And almost all Chinese international purchases are directed by the Communist Party.

They could expand or shrink the international yuan float almost instantaneously.

[Alberta's Child]

The author makes a very good point here. I’d take it one step further by suggesting that the yuan is completely worthless on its own. It only has value as an international exchange currency because it’s pegged to the dollar, and you can’t use it to make any real investments in China that have any worth (it’s a country with a totalitarian government, and is dominated by state-run industries). If the yuan weren’t pegged to the dollar at a nearly fixed rate, nobody would ever want to use it except the Chinese themselves.