Comments on: why arent the chinese allowing free market to dictate the value of their currency ? http://www.myylt.com/2010/02/01/why-arent-the-chinese-allowing-free-market-to-dictate-the-value-of-their-currency/ Discussion of Forex Trading and Currency Trading Wed, 23 May 2012 15:24:07 +0000 http://wordpress.org/?v=2.3.3 By: Senior Year YOG 2010 http://www.myylt.com/2010/02/01/why-arent-the-chinese-allowing-free-market-to-dictate-the-value-of-their-currency/#comment-22081 Senior Year YOG 2010 Tue, 30 Nov 1999 00:00:00 +0000 http://www.myylt.com/2010/02/01/why-arent-the-chinese-allowing-free-market-to-dictate-the-value-of-their-currency/#comment-22081 Because they are purposely trying to keep the currency low. So their exports will be cheaper, since that is what their economy runs off of mostly. What they need to do, is lower interest rates, allow their currency to rise and allow their people to consume their own products. instead of shipping them to us. Their products are decent quality that their own people can use. They can leave the US economy in the dust, but unfortunately they have not done that....yet. Because they are purposely trying to keep the currency low. So their exports will be cheaper, since that is what their economy runs off of mostly.
What they need to do, is lower interest rates, allow their currency to rise and allow their people to consume their own products. instead of shipping them to us. Their products are decent quality that their own people can use. They can leave the US economy in the dust, but unfortunately they have not done that….yet.

]]> By: Eric Rasmussen http://www.myylt.com/2010/02/01/why-arent-the-chinese-allowing-free-market-to-dictate-the-value-of-their-currency/#comment-22082 Eric Rasmussen Tue, 30 Nov 1999 00:00:00 +0000 http://www.myylt.com/2010/02/01/why-arent-the-chinese-allowing-free-market-to-dictate-the-value-of-their-currency/#comment-22082 For a start, most Asian nations are quite sceptical of free markets. Japan was keen to keep the value of the yen low for years. Even after they claimed to join the US and Europe in "free" currency markets they would adjust capital controls on investing abroad or investing in Japan to prevent rapid shifts in the yen-dollar rate. Malaysia and Thailand also use capital controls. Now comes China. Like Japan in the 1970s and 1980s it sees exports as the key to growth. With high unemployment in the rural areas it wants to keep those export factories in Shanghai, Wuxi, and Guangdong operating at a fast clip. But there is another aspect to this that the US and other countries are not keen to admit. Suppose China did allow the Yuan to appreciate. The rise might be relatively gradual. If you want to buy a Chinese asset, either or stock or a bond, you can do that now. While many foreigners are willing to hold Chinese stocks (I own a few) they keep it a small part of the portfolio. Lots of volatility there so you don't want it to be 10-15% of your holdings. And there is not much appetite for Chinese bonds. It's a new currency on the international block. Moreover, Chinese are saving at a whopping rate, stuffing away over 30% of their income. Don't count on them rushing out to buy consumer goods just because they become a bit cheaper. No, they are not going to buy power mowers, US refrigerators or frozen french fries. And while Chinese companies import plenty of capital goods that is really a function of investment demand and absorption capacity. Think of it this way: you don't buy another Caterpillar backhoe just because it's cheaper. You do it because (1) you are doing more infrastructure work, and (2) you have enough staff that know how to operate one. If the Yuan rises relative to the dollar US exports to China will increase a bit faster than they are now. But it won't be dramatic. Econometric studies show that it takes about nine quarters (27 months !) for the effect of a yen-dollar exchange rate shift to be fully reflected in the export and import flows. It might take about that long for a Yuan-Dollar shift also. For a start, most Asian nations are quite sceptical of free markets. Japan was keen to keep the value of the yen low for years. Even after they claimed to join the US and Europe in "free" currency markets they would adjust capital controls on investing abroad or investing in Japan to prevent rapid shifts in the yen-dollar rate. Malaysia and Thailand also use capital controls.

Now comes China. Like Japan in the 1970s and 1980s it sees exports as the key to growth. With high unemployment in the rural areas it wants to keep those export factories in Shanghai, Wuxi, and Guangdong operating at a fast clip.

But there is another aspect to this that the US and other countries are not keen to admit. Suppose China did allow the Yuan to appreciate. The rise might be relatively gradual. If you want to buy a Chinese asset, either or stock or a bond, you can do that now. While many foreigners are willing to hold Chinese stocks (I own a few) they keep it a small part of the portfolio. Lots of volatility there so you don’t want it to be 10-15% of your holdings. And there is not much appetite for Chinese bonds. It’s a new currency on the international block.

Moreover, Chinese are saving at a whopping rate, stuffing away over 30% of their income. Don’t count on them rushing out to buy consumer goods just because they become a bit cheaper. No, they are not going to buy power mowers, US refrigerators or frozen french fries. And while Chinese companies import plenty of capital goods that is really a function of investment demand and absorption capacity. Think of it this way: you don’t buy another Caterpillar backhoe just because it’s cheaper. You do it because (1) you are doing more infrastructure work, and (2) you have enough staff that know how to operate one. If the Yuan rises relative to the dollar US exports to China will increase a bit faster than they are now. But it won’t be dramatic. Econometric studies show that it takes about nine quarters (27 months !) for the effect of a yen-dollar exchange rate shift to be fully reflected in the export and import flows. It might take about that long for a Yuan-Dollar shift also.

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