The undervaluation of the renminbi : EU point of view

[DAVOUT]

Originally posted by DanS

Why would it be dangerous? This stuff doesn't often happen overnight, after all. Also, does the Euro area have an asset of the size, liquidity, and quality of the US treasury market?

Dangerous was referring to the consequences, but I am prepared to replace dangerous by*less than desirable* if we refer to the event.

I have not the figure over several years, so my fear could be misplaced, but I have in mind that in september the trade deficit was about 40 billions when the foreign investments were only of 5 billions. Till now, the two figures where about equal, the foreign trade deficit was entirely financed by foreign investments. If the september situation was to last, dont you believe that it would have *less than desirable* consequences?

I dont want to trouble your confidence in the US Treasury market, but I would rather name it a liability than an asset. Its liquidity is not immune, as for any piece of paper, to come close to evanescence.

[Kidlicious]

Originally posted by DAVOUT
And it is at this point that more flexibility, Kidicious, would be usefull. It would make possible a smooth fall of the yuan, untill it reachs a level where 1) the reduced price of Chinese goods triggers an increase of the exports, or stop the fall, and 2) the increased price of foreign goods triggers a reduction of the imports, or stop their growth.

Wait. Isn't the yuan undervalued? Why would it fall in value?

[DAVOUT]

Originally posted by Kidicious


Wait. Isn't the yuan undervalued? Why would it fall in value?

I was answering to the hypothesis made by DanS that China could have a foreign trade deficit in the future, and how it could be corrected, and to your question.

As far as the value of the yuan is concerned, I personnaly dont know whether it is over or undervalued; all what I know is that the US claims that it is scandalously undervalued, and the IMF says that there is no evidence of significant undervaluation. Until somebody more qualified in these matters tell the contrary, I stick to the IMF statement.

[Kidlicious]

Originally posted by DAVOUT


I was answering to the hypothesis made by DanS that China could have a foreign trade deficit in the future, and how it could be corrected, and to your question.

As far as the value of the yuan is concerned, I personnaly dont know whether it is over or undervalued; all what I know is that the US claims that it is scandalously undervalued, and the IMF says that there is no evidence of significant undervaluation. Until somebody more qualified in these matters tell the contrary, I stick to the IMF statement.

It doesn't seem in the interest of the Chinese to have a overvalued currency, especially since everyone here seems to agree that foreign exchange earnings are so important for them.

[DAVOUT]

Originally posted by Kidicious


It doesn't seem in the interest of the Chinese to have a overvalued currency, especially since everyone here seems to agree that foreign exchange earnings are so important for them.

The main advantage of the peg to the dollar is that they are automatically protected against an overvaluation of their currency with their biggest client.

[DanS]

Here's an article about Greenspan's Dallas speech, which dealt with this topic.

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1069493923248&p=1045050946495

[Kidlicious]

Originally posted by DanS
Here's an article about Greenspan's Dallas speech, which dealt with this topic.

http://news.ft.com/servlet/ContentSe...=1045050946495

Well, a stronger yuan would at least increase demand for US goods in China, and China is contributing more to global growth than any other nation. So, I have to disagree.

The figures on the money supply growth in China are disturbing though. 20% a year, yikes!

[Kidlicious]

Originally posted by DAVOUT
I have not the figure over several years, so my fear could be misplaced, but I have in mind that in september the trade deficit was about 40 billions when the foreign investments were only of 5 billions. Till now, the two figures where about equal, the foreign trade deficit was entirely financed by foreign investments. If the september situation was to last, dont you believe that it would have *less than desirable* consequences?

According to the flow of funds account at the Fed, there has been an increase in the flow of capital out of the US. I'm looking at line 9 of F.107 Rest of the World. It show a net $559.1 billion net outflow, adjusted annually, for Q2 2003. That number is up from $375.9 billion in 2001 and and $199 billion in 1988.

I don't know how to tell if the outflow can continue to increase at this rate without adverse effect for long, but I saw on the financial channel yesterday that Citibank predicted the dollar to stablize next yeat.

[Kidlicious]

If China's economy does overheat it could be very bad. Both the US and China with over capacity. The US will still be trying to stop its trade deficit from getting bigger, and China desperate to export its way out of its problem. It could get nasty.