Wednesday, March 17, 2010

St. Patty and the Chinese Dragon, Yuan

Betty is in the kitchen pouring two very nice bottles of Guinness Stout over a perfectly innocent corned beef roast. While most of us in the USA have no idea why we drink Guinness, wear Green, and try to speak with an Irish accent every March 17, we gladly partake in the annual festival of St. Patty. Even if we are Jewish. Anyway, I digress. St. Patty had nothing to do with China or a dragon and I just said that to get your attention so I could spout off a little bit about the Yuan.

No the yuan is not a Chinese Dragon or an Irish Whiskey. Rather it is the official name of the Chinese Currency. We have a a dollar -- they have a yuan (also referred to as a renminbi, reminbi, or mean and ugly culprit leading to the demise of all red-blooded Americans.) The markets say that 1 yuan will get you about 14 cents. Or put the other way -- $1 will get you about 6.83 yuan.

For the last year and a half China returned to the practice of pegging the value of the yuan at 6.83 to the dollar. Previous to that, China was, more or less, letting the yuan/dollar exchange rate float. Market forces pushed the value of the yuan up -- meaning one could get more dollars with a yuan. The US government thought that was really cool since it meant that US goods and services would be cheaper to buy in China and all our problems would disappear, including teenage acne. But those fun days are gone and the Chinese have gone back to "pegging" at a value of 6.83.

That makes some of our people livid (imagine responsible government officials foaming at the mouth). So lately we see lots of stupid statements from both US and Chinese officials. "You guys are protecting your economy illegally." Other side retorts "No we are not. Na na na na na." "We are going to beat you up if you don't let your currency float." Retort -- "My mother's bigger than your mother."

This gets us back to my theme about spouting. Where is the cause and effect? Where is the rational approach to policy and international relations? Will letting the currency float again really make a big difference? Are we really getting anywhere?

Let me finish this rant with some questions....

If China lets its currency float, will its value rise against the dollar? Enough to make a major difference?

If it rises against the dollar, how big an effect will that have on US exports to China?

Speaking of exports to China, what does China usually buy from the US? Do they need/want more?

If China is not buying enough goods and services from the US, do we know why?

The last time China let the yuan float, what happened to US exports to China? To the trade deficit between US and China?

What do we buy from China? Why do we buy so much?

If the yuan rises against the dollar -- will US importers be filled with joy? How will that impact US households? How will that affect US business decisions with respect to prices they charge at home?

If the Chinese government stops buying dollar assets as their way to let the yuan appreciate, what will that do to US bond markets? US interest rates? Other US financial markets?

How do these changes in financial markets help/hurt our avowed US monetary policy to keep interest rates near zero for the foreseeable future so as to stimulate domestic spending?

China seems to be a fast growing but risky place -- if they bet the farm on trade surpluses then how will smaller trade surpluses help their national stability?

Is an unstable China a good thing for the USA?

As a developing country -- can China easily replace the foreign demand for goods and services with local consumer spending?

Who put the bop in the bopshebop who put the ram in the ramaramadingdong?

Looks like I ran out of questions and the smell of corned beef is wafting down into my basement office. This spout is all about approaching policies sensibly and without extremism. Is the exchange rate issue with China really as simple as some of our talking heads make out? I think not! Let's tell them to shut up until they have something useful and constructive to say.


  1. The simple answer is that if the $US remains strong a pegged renminbi is good for us (cuz we can buy stuff cheaper than if it floated). If, as happening now, the $US is tanking it really does not matter how the renminbi is valued vis avis $US (cuz as my old DI use to say "we will be living in a world of $hit).

  2. Erin Go Bragh and a Happy St. Patrick's Day to both you and Betty"!

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  4. Just ran across this link. I am no fan of Debbie; but it does directly relate to this blog.

  5. Larry,

    Since you put out a few questions in your comments above, I thougth I would also ask one. I am curious to know how you view the resistance of China to address the concerns of US and European companies regarding the protection of their intellectual property and its effect on our trade relations with China. Will it become a serious problem in our future relations with China?

  6. Bob,

    Good question. China is a sovereign and a very proud nation. China believes it is an equal in foreign policy discussions. Being a developing country it is not now nor will it be for some time equal to the US or Europe in terms of its ability to address the concerns you mention. For example, China does have plenty of laws on the books to protect intellectual property -- but enforcing the laws is a whole other matter. I am sure they could muster stronger enforcement if they wanted to but in the context of all their goals, the overall costs might be too high. Notice that lack of enforcement over 30 or more years has not greatly hindered their ability to attract the top firms in the world. There is no black and white here. The world sees great advantages that come along with a richer and more stable China. But it will take time. In the meantime we wink at their faults and, now and then, put real pressure on them to make progress. Since neither the US nor EU are free from protectionist policies -- China can point and cajole as well.