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Chinese Yuan – Is it undervalued? October 24, 2009

Posted by hslu in China, Economics, Global Affair.
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Chinese Yuan – Is it undervalued?

Mr. Krugman of the NY Times suggested in his op-ad that Chinese Yuan is undervalued because it is pegged to the US dollar. As US dollar losing its value on the world market, Chinese Yuan is also headed lower.

He suggested that Yuan should strengthen and the United States should do something about it. A lower Yuan helps China exporting its goods to the world. At the same time, Krugman failed to point out, consumers all over the world also benefit from lower inflation.

His comments stemmed from Treasury Department’s assessment of Chinese monetary policy in a report to Congress last week. The report declared that China is not manipulating its currency but expressed “concerned” of Chinese government’s action.

The timing of the report was most intriguing because the YS president is about to visit China and he didn’t want to offend China which holds more than $800 billion of US treasury notes.

There are several points that I found interesting:

  1. I believe the US is now in a much weaker position economically against China compared to what it did in mid-1980 against Japan. Mounting national debt and blooming federal deficits boxes the US in a corner which is hard to get out in the near future. Since the deficit is expected to get worse in the next few years under current administration’s push for a bigger government, the US has to kowtow to China to avoid further decline of the US dollar. In mid-1980, the US, with coordinated efforts from other developed countries, forced Japan to strengthen its currency through what was called the Plaza Accord. The rapid rise caused in part the collapses of its stock market and asset values pushing Japan into two-decade long recession.
  2. The president is about to visit China. The beta male mindset of the current president dares not to offend its host before the visit which resulted in the language of the Treasury Department report.
  3. Chinese Yuan is pegged to a combination of currencies including the US dollar which Krugman conveniently failed to point out in his article too.
  4. Why should China raise the value of its currency when it is facing rising unemployment and troublesome social unrests? China knew what the US did in the mid-1980 to Japan and has gradually allowed it to rise in the past two years or so. I think China has learned the lessons and will raise the value of Renminbi on its own terms no matter who is making the noise; Nobel Price winner included.
  5. A weak nation will also lose out to the demands of a stronger nation. This is the norm instead of an exception in the world of global economic war and politics. Every nation in the world should protect its own interests but in reality some countries win while others lose the battle in the process.
  6. A crucial question Krugman failed to ask in his op-ad is who is responsible for a weak US dollar in the first place? He knows that the answer is the United States itself. The current administration does not care about the mounting unemployment rate and the ill-conceived stimulus package failed badly to create jobs promised by the president in January 2009. At the same time, he, with support of Pelosi and Reid, pushes his social agenda, increase the size of the government and ran up government debt to as far as eyes can see. It is none other than the reckless action of the president which is responsible for a weak dollar.
  7. I believe that the United States actually likes to see a weak US dollar because the export sector is the only sector that is showing any sign of life in the current economy.

I think it is unavoidable that the United States will gradually see China as a rival instead of a strategic partner. It may have already happened behind the scene in the corner offices of Pentagon and in the war room of the White House after China’s impressive showing of military capability at the celebration of China’s 60 year Anniversary earlier this month. With second-class naval fleets, China is by no means a military threat to the US. What the US is concerned about is that sooner or later China will pose a threat to the US a decade or two later.

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China has money and I have every reason to believe that its leaders will use it wisely such as the development of advanced technologies in the fields of outer space, weaponry and first-class naval fleets.

The United States is living on borrowed funds and will sink the nation deeper into a rat hole. However, the United States is still the strongest nation in the world but it is dying a slow death which will take decades to complete. Spain, France and Great Britain all had their time under the sun. For 60 years, the United States has enjoyed the unprecedented prosperity since WWII. However, the baggage is catching up with them fast. Once the economy shows any signs of recovery, interest rate will go up and the US will pay much more interests to debt holders such as China and Japan. Well, the United States can always crank up the printing press. The question is whether the other nations will continue to buy it in the future.

Maybe Mr. Krugman should devote some time to address this issue.

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