The undervaluation of the renminbi : EU point of view

[Kidlicious]

Originally posted by DAVOUT


That makes at least one point where you are in strong agreement with President Bush.

That make only one point.

[Kidlicious]

Originally posted by DAVOUT
The yuan is not convertible, consequently it can be reevaluated (or devaluated) by a decision of the Central Bank of China. There would be no direct mechanical effect on the US $, and little difference on the trade imbalance (as worded by the IMF) of the US; and still less on the EU.

The Euro is not strong currently, it just reflects the weakness of the dollar, in the same manner as gold does.

If the price of oil is raised in due proportion of the fall of the $, it would not change the fate of the world except for the US (and China). Precisely, it would widen the US trade deficit.

All that makes the reevaluation of the yuan hardly a solution to the trade deficit problem.

A reevalution would not balance trade between the two countries but it would slow the growth of the deficit. It would also make the dollar even weaker and the Yuan stronger. That would affect the Euro. It would become stronger to the dollar and weaker to the Yuan.

[Tripledoc]

Davout.

What would happen if the European Central Bank decided to let go and start a massive devaluation of the Euro? Would that not solve a lot of problems.

[DAVOUT]

Originally posted by Kidicious


A smaller trade deficit with China would strengthen the dollar.

Of course.

The point is, in this case, that the trade deficit would not be significantly affected : the jobs will not come back in the States, and if the sources are changed (other asian or south american countries), the prices will be higher, and if they are not changed, the prices will be higher as well.

The only possibility granting a reduction of the deficit would be a reduction of the volumes imported, but this would cause a reduction of the consumption and of the employment.

[Kidlicious]

Originally posted by Tripledoc
But the artificially low Chinese currency forces the Japanese to secretly buy vast amounts of dollars to keep their Yen low and competitive. Hence if the Chinese strengthens the Dollar, the Japanese would then have to buy even more Dollars in order to stay competitive.

Ok, sorry my last reply to you was not correct. The Chinese central bank buys dollars to make their currency weaker. If they revalue then they will buy less dollars. That would weaken the dollar. And yes the Japanese may choose to buy more dollars to maintain a consistant exchange rate with the dollar.

[Kidlicious]

Originally posted by DAVOUT


Of course.

The point is, in this case, that the trade deficit would not be significantly affected : the jobs will not come back in the States, and if the sources are changed (other asian or south american countries), the prices will be higher, and if they are not changed, the prices will be higher as well.

True

Originally posted by DAVOUT
The only possibility granting a reduction of the deficit would be a reduction of the volumes imported, but this would cause a reduction of the consumption and of the employment.

Consumption maybe. Employment no, the reverse probably would be true.

[DAVOUT]

Originally posted by Tripledoc
But the artificially low Chinese currency forces the Japanese to secretly buy vast amounts of dollars to keep their Yen low and competitive. Hence if the Chinese strengthens the Dollar, the Japanese would then have to buy even more Dollars in order to stay competitive.

I have not yet seen a clear demonstration that the yuan was undervalued; and the IMF, after the EU, has just said that the yuan is NOT undervalued. Therefore I would refrain from qualifying the yuan of beeing artificially low.

The Japanese receive every year a large amount of $ from their positive trade balance with the US (smaller than China); this is mainly converted in Treasury bonds, instead of being sold on the market, which would strenthen the yen and weaken the $. In addition, when the dollar is weakening sharply, they can buy, from time to time a few billions on the market, but they are unable to buy the quantities that would have prevented the $ to fall below 110 (which was their target).

[DAVOUT]

Originally posted by Tripledoc
Davout.

What would happen if the European Central Bank decided to let go and start a massive devaluation of the Euro? Would that not solve a lot of problems.

As you know, the Euro is fully convertible; its value depends on the market which establishes its value after consideration given to interests rates, growth, inflation, political circumstances, general mood, ... The Central Bank controls only one parameter : the interest rate. So, the answer to your question is : No, the Central Bank cannot decide a massive devaluation. But it could decide to take advantage of a weakening dollar to decrease the interest rate which is still higher in Europe than in the US.

Anyway, there is no guarantee that the market will find it enough for changing its mind, but it could help.

[DAVOUT]

Originally posted by Kidicious


Ok, sorry my last reply to you was not correct. The Chinese central bank buys dollars to make their currency weaker. If they revalue then they will buy less dollars. That would weaken the dollar. And yes the Japanese may choose to buy more dollars to maintain a consistant exchange rate with the dollar.

Once again, the Chinese Central Bank doe NOT buy dollars but Treasury bonds with the dollars gained through their positive trade balance.

[Kidlicious]

Originally posted by DAVOUT


Once again, the Chinese Central Bank doe NOT buy dollars but Treasury bonds with the dollars gained through their positive trade balance.

And once again you are wrong, but I don't have anymore time to school you.

[DAVOUT]

Originally posted by Kidicious


And once again you are wrong, but I don't have anymore time to school you.

I can tell with what the Treasury bonds are paid, but you cannot explain how and with what the dollars would be paid.

[DanS]

For the life of me, I cannot find that article. Can you cut and paste?

I'm interested.

[Kidlicious]

Originally posted by DAVOUT


I can tell with what the Treasury bonds are paid, but you cannot explain how and with what the dollars would be paid.

First of all the Chinese Central Bank does not have the power to maintain a peg without buying dollars. That fact stands alone by the fact that Chinese currency exists outside of China.

Second, even if they did have the power to peg a currency to another without buying that currency it would have a negative effect on their trade.

Let's say that the US govt wants to fix the price of widgets at some price that is higher than the market price. It can either buy widgets until the market price increases to the desired price, or it can rule by decree that widgets can only be traded at the desired price. If they rule by decree they will significantly effect the amount of widgets sold, because many buyers will not buy at the new price. Sellers want to sell, and they can make more profit at the market price, but they can't.

Now you insist on believing that 1) China has the power to maintain the peg without buying dollars, and 2) that China can benefit by ruling by decree what the price of their currency will be. Even if they could rule by decree both nations would lose out on trade. Buyers in the US would buy less and sellers in China would want to sell more at a lower price but wouldn't be able to.

edit: The last sentence is wrong. Buyers in the US would be more than willing to buy more. The problem would be getting the producers in China to export more. Not a very good example then I guess. Change my example to the US govt setting a price ceilling for widgets instead and it works. Sorry.

[Kidlicious]

When you set the price below market price you create a shortage, because the sellers will only be willing to sell less at that price. That's what the CCB would be doing if they pegged their currency to the dollar without buying dollars. Remember, when there is a shortage the quantity sold is what the sellers are willing to sell at that price, not what the buyers are willing to buy at that price. So with a fixed exchange rate below the market exchange rate a smaller quantity is exported and of course the price of the goods exported is less. That's why the CCB wouldn't do that.

[:) Smiley]

The US and EU should be careful for what they asked for. When they got the Japanese Yen to increase in value in hopes to stop the flood of Japanese products, the Japanese started buying up US corporations and real estate.