The only thing I’m slightly confused about is that.. if the yuan is kept relatively low, doesn’t that mean it’s more beneficial to the US since we’re importing a lot from them?
So why raise the currency?
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December 29th, 2009 at 7:49 am
Exactly!
But the rise in the Yuan will not help China because it will be more costly for America to buy their goods. However, since American policy is one of stopping overspending, this change will help to make her exportable products less costly.
December 29th, 2009 at 7:49 am
The real reason is…
China already bought SHIT loads of paper from the U.S. printed with big words - U.S. bonds
If China raise Yuan’s value against USD, the U.S. does not have to pay back as much.
In fact, when China bought majority of those bonds in the last 10 years when the exchange rate was always 1 USD = 8.3 Yuan.
About two years ago, China was under lots of pressure from the U.S. and raised the Yuan’s value. Now the exchange rate is about 1 USD = 6.7 Yuan.
The result? China lost over 20% the investment instantly = the U.S. got away with over 20% the debt owed to China instantly.
Now, the U.S government continue to spread the rumor through mass media that China keeps Yuan low in value on purpose for "unfair trade", while keep pressing China to change that. The real purpose is obviously want to get away with more of the debt, a lot more…
December 29th, 2009 at 7:49 am
Vash is missing the fact that Europe wants china to raise its exchange rate also.
If you have a low exchange rate your goods are relatively cheap. So you export more. China exports a lot to the US. BUT if china is getting US dollars, they need to use those dollars so they invest in US bonds which are very secure, but have a low rate of return. Since china sells so many exports it creates a trade deficit.
This doesn’t just affect the US and Europe though because China’s goods become cheap relative to other countries also and so they can’t sell goods as easily to the US and Europe.
When China eventually does raise its exchange rates, money is going to fly out of that country and they are going to start buying tons of stuff from India and Africa, which will then be much cheaper. It will really stop the Chinese Economy in its tracks. Plus, no one will buy more expensive goods from China if they can buy them from Vietnam, Indonesia…for less or from their own country and have better quality. But in order to keep social stability at the present the government needs to keep growing the economy and the economy is focused on exports. China is selling its future for its present.
Is the US glad to pay back the bonds with devalued money? Yes. Did China know this would happen? Absolutely. The countries of the world are rising and so the Dollar will naturally decline.And since the US is an open economy with a floating exchange rate, expansionary monetary policy is how you get yourself out of a depression. Once the economy picks up their should be a tightening of policy.
December 29th, 2009 at 7:49 am
Agreed with Vash.
The more the Yuan goes up, the less money the Americans have to pay back to China. Since in order to leave the economic crisis, the American government is asking China to lend it a lot of money, one day they’ll need to pay this money back. So now the American government is counting on that when that day comes, they can pay back less.
But the higher the Yuan goes, the higher the prices of Chinese made goods, and the American family would have to pay more for a living. So by pushing China to raise the currency, the US government is actually asking the American citizens and other people in the world who buys Chinese-made products to help pay the money they owe China.
As with the Europeans, they want the Yuan to raise because they want their producers to gain a relative superiority in world-wide trade (when yuan raises, Chinese products become less cheap so the European products gain). But the Americans simply don’t produce the same stuff that Chinese make, so they don’t care about this part.