Anyone familiar with Asian Currencies compared to the US Dollar?

Yes, the yuan is undervalued and held that way by the Chinese government. China is artificially keeping their currency week to boost chinese companies' exports. If their currency is weak, more people abroad can purchase chinese products for a cheaper price, which increases chinese companies' export revenues, growing their business.

In terms of helping/hurting the Chinese economy, it basically means that the Chinese will have more expensive imports in their country, but their own exports will be cheap for others. Since they are a net exporting country, I would think it would help their economy.

 

A good article I was reading on this below:

China's current currency condition needs an update REAL WORLD ECONOMICS:
EDWARD LOTTERMAN
Columnist

I owe U.S. Treasury Secretary John Snow big time. I'm teaching international economics right now and the news his recent remarks in China generated gave me material for weeks.

For those who missed it, Snow went to Asia in late August. While in China, he appealed to that nation to float its currency in international foreign exchange markets and let it depreciate against the U.S. dollar.

Chinese officials were quick to state that their financial system is not ready for a free-floating currency and they are not going to change existing foreign exchange policies. Pundits and editorial writers have been arguing about who is right.

One may wonder what the hullabaloo is all about.

For 25 years following World War II, exchange rates for most nation's currencies were fixed, and most were referenced to the U.S. dollar. That system largely ended in the early 1970s. The values of the currencies of most industrialized nations now float. But some nations, including China, continue to maintain an official or unofficial fixed rate for their currency relative to some other key currency.

Setting an official exchange rate isn't the end of the matter. If China wants to maintain an official rate, it has to sell dollars at the official rate to anyone with yuan who wants them. Moreover, it has to buy dollars, using yuan, whenever anyone has dollars they don't want.

Maintaining the fixed rate is easy — as long as the market is such that yuan offered for dollars at the official rate roughly matches dollars offered for yuan. Maintaining such a fixed rate becomes difficult, however, when there is a mismatch.

The most common problem is that a currency becomes overvalued when the official rate values the currency higher than the market does. If the currency is pegged to the dollar, the country's central bank has to sell dollars to everyone with a handful of domestic currency that they want to exchange.

When the central bank runs out of dollars, as most eventually do, there is a foreign exchange crisis such as those in Asia, Brazil and Russia in 1997-1998 and repeatedly in Mexico over the last 25 years.

China's problem is just the opposite. The yuan is undervalued compared to the rate that would prevail in a free market. So its central bank has to hand out yuan and buy dollars. Since it can create all the yuan it wants, there is no danger that it will "run out." But buying up surplus dollars results in an unintentional loan to the U.S. Treasury and is hard to sustain over the long run.

The Chinese government has been buying dollars like crazy to keep it "strong" or expensive. Looking at the other side of the coin, it is keeping the yuan "weak" or inexpensive.

Estimates are that the Chinese have bought up some $80 billion in the last 18 months. The Chinese central bank puts many of these dollars into U.S. Treasury bills, though its decision to hold onto lots of dollars implicitly constitutes a loan to our country whether they buy such bonds or not.

Why would a capital-short developing country make huge loans to a capital-rich United States? The Chinese don't want to do this, but they have to if they want to maintain a strong dollar/weak yuan situation. Why? Because a weak Chinese currency keeps Chinese products cheap for U.S. consumers.

If China increased the value of its currency by going to a higher, but still fixed, rate or if it simply let the yuan float, U.S. imports from China would drop substantially. The Chinese government does not want to face the economic and political consequences of such an export decline.

Snow's critics argue that ending China's artificial support of its currency would reduce its purchases of U.S. Treasury issues. That would push up U.S. interest rates. Moreover, they argue, a weaker yuan would hurt U.S. manufacturers based in China or U.S. companies such as Wal-Mart that import from China. Finally, higher-cost imports from China would contribute to higher inflation in the United States.

All this is true, but ignores the glaring fact that current levels of Chinese exports to the United States cannot be sustained forever. Similarly, the Bush administration's federal deficits are not sustainable over the long term.

Exchange rate changes are how market economies respond to imbalanced trade flows. Higher interest rates signal that capital is becoming scarcer. China's current dollar-buying spree suppresses these important market signals within both countries' economies.

China is a sovereign state and ultimately will set its own policies regardless of U.S. pressure. Many western economists echo the concern that China's financial system is not sophisticated enough to handle floating rates.

Push is coming to shove, however, and China will have to act sooner or later. A managed revaluation to a cheaper dollar is probably the best alternative.

 

Revaluing it in a series of small steps.

 

I believe he means instead of letting the yuan float in the free market and having drastic swings, gradually revaluing it.

 

Rather than having the government buy or sell yuan/dollars at a fixed rate (like 100 yuan per dollar or whatever), buying it at market rates.

or technically:

float


Definition 3

To allow the value of currency to be determined solely by supply and demand without outside interference.

 

We were screaming bloody murder about the Yen 15 years ago when we thought Japan would own the world. Same thing now with the Yuan.

The Yuan has been pegged to the US dollar at around 8.3 for 10 years. They are essentially tying their success to our success. They have a huge trade surplus with us, but they also use that money on T-bills. I'm not sure how revaluing the Yuan would help American manufacturing jobs. If the Yuan appreciates 40%, then all the imported goods from China will cost more. The hope is that our products will be more competitive in terms of pricing and manufacturing jobs will be kept. However, even if the Yuan doubles in price, I'm pretty sure that it's still cheaper to make things overseas than here in the US.

Back in 1997 during the financial crisis in Asia, the Chinese could've devalued the Yuan to maintain their competitive edge with the other Asian Tigers. Instead they held firm and took the hit. We said bravo then. Now the dollar is down and our economy needs a boost, we're essentially asking China to help us out. We could pull the tariff card, as with steel, to punish them. But that would really just shift the burden to consumers.

 

Ditto.

US manufacturing sector is not going to gain anything from a revaluated Yuan. If anything, goods from other developing countries (South East Asia especially) will take over the place of China's products in Wal-Mart.

 

My impression is that the country that is suffering the most from the undervaluation is Mexico. Whereas they would prefer to be exporting to the US, the the cheap yuan translates into an influx of imported goods from China.

Also, given China's large untapped production potential, both in terms of natural resources and skilled manpower, I think that they would be more able to weather the type of thing that has happened in Japan, where the entire process seemed artifical given their diminuitive size and lack of natural resources.

The main concern that I have with China is the fact that the US has become an "information exporter" and China has a history of not enforcing basic intelectual property rights. They seem to be getting better, but how much of that is passive response to pressure from the US?

 

Nikos,

Yuan vs Dollar is too big a topic even for AG. I would like to chip in my 2c, though. I have witnessed the great Yuan irony in the last 18 years or so.

Back in 1988, I worked and lived in Shenzhen, China, a special place where the morden Chinese capitalism started. China just started to open up to the world, and suffered comparative disadvantages in the world trade. There was a hyper-inflation going on in the country. For example, a pack of Marlboro cost more than 10 Yuan, which just costed 6 yuan 2 years before. One USD could only buy 3 yuan in 1986. But it was about 1:8 in 1988.

Then came the Tiananmen and 3 years of econimic stagnation.

Since 1992, China adopted a more gradual and open-door policy to sustain long-term and stable economic growth. In 1994, China started a fix exchange rate against the dollar, which was about 1:8.3. That exchange rate was not out of imagination. It justly reflected the then de facto market exchange rate, i.e., the black market rate. Since than, the dollar:Yuan exchange rate is floating within a very tight trading band, virtually fixed at 1:8.3.

Then came the Hong Kong returning to China in 1997. At that time, a fixed exchange rate was a cornerstone for many economies. Hong Kong implemented a 1:7.8 fixed rate against the dollar in 1987 and is still effective today. The Hong Kong's peg was implemented by the British government in fear of economic volatility after the decision of returning Hong Kong to China made in 1984. It was hailed by the world investment community, i.e., the rich nations.

Then came the great Asian finacial crisis in October, 1997. The so called Asian tigers and wild cats were racing to devalue their currency against dollar. At that time, the world community, i.e., the rich nations, literally begged China not to devalue Yuan. Otherwise, the world would be dragged into that financial crisis and a great global deflation would ensue. China heeded the voice of those "beloved" rich nations and bit the bullet. The Yuan standed at 8.3:1 against dollar and still is today.

Now, Yuan is indeed undervalued in comparative economic sense. Certainly, there are many reasons that have contributed to the rise of the Yaun. Currency manipulation is the least of them. Hardship and thrifty of the Chinses workers may have contributed most.

Today in China's government circle, a widely accepted view is that it would be reasonable to have Yuan valued at 5:1 against dollar by 2008, due to the economic reality and forecast. It's not if but when Yuan should start revaluation. At this moment, China has a potential economic time bomb under its belly, i.e., its effectively bankcrupted banking system. The reason why China's largest banks haven't declare bankcrupcy is the same reason why yuan is overvalued and shielded from currency speculators, i.e., a heavily regulated financial market.

Long story short, Look for a 5% trading band of Yuan against dollar every year until 2008. Then, all bets will be off, i.e., the market will determin the fate of Yuan vis vi dollar.

BTW, The Wall Street Journal has published several excellent articles on this Yuan topic in the past month, with both sides of view. Yuan is an economic issue in the context of today's globalization. However, Yuan has nothing to do with the election of the president of the United States, IMHO.

 

Hot from the Wall Street Journal:

http://online.wsj.com/article/0,,SB...?mod=opinion%5Fmain%5Freview%5Fand%5Foutlooks


REVIEW & OUTLOOK


Snow's Currency Job

As the U.S. economy accelerates, the main risk to a sustained recovery is clearly international. Growth remains sluggish in Europe and Japan, free trade took a hit at Cancun, and this weekend U.S. Treasury Secretary John Snow decided that the time was somehow right to lead the world back to the future of currency manipulation.

Global financial markets immediately responded with catcalls and hisses, with stocks falling just about everywhere (especially hard in Japan and Korea), the dollar diving, and bond yields and gold rising. Yesterday Mr. Snow scrambled to explain that "There has been no change in the strong dollar policy." But who are investors supposed to believe -- Mr. Snow, or their own eyes?

What the world read over the weekend, coming out of the meeting of G-7 finance ministers in Dubai, was a communique that included a notable change in exchange-rate policy. The ministers declared that "more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms." That new language supplants the usual and useful G-7 boilerplate about the virtues of "exchange-rate stability." What investors fear is that this means we are headed back to a world of beggar-thy-neighbor competitive devaluations.

Everybody understands that Mr. Snow's political targets here are Japan and especially China, which is becoming a U.S. Presidential campaign issue. His successful browbeating of the G-7 came after his failed attempt earlier this month to prod China to revalue the yuan. The Bush Administration seems to believe that if it shows it can flog China just as hard as the Democrats do, then somehow the issue will go away. But the Administration is playing with protectionist matches.


[ GOOD ADVICE

Obligations Regarding Exchange Arrangements

"In particular, each member shall: (iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."


Source: IMF Articles of Agreement, 1976]


It's always possible that things aren't yet this bad, and that we are merely witnessing the hard currency education of one more rookie Treasury secretary. Mr. Snow ran a railroad in private life and perhaps he wasn't paying attention to the global currency crises of the past 70 or so years.

Since arriving at Treasury he has been repeating that currency prices ought to be "flexible" and "set by the market," as if the dollar was like corn or tin. But currencies aren't just another commodity; they are a medium of exchange. Exchange rates aren't set on some trading floor but are mainly a function of monetary policy set by central banks.

If Mr. Snow really wants a cheaper dollar relative to (say) the Japanese yen, the Federal Reserve is going to have to increase the supply of dollars relative to yen. (Or the Bank of Japan has to do the reverse.) This implies changes in domestic interest rates and future inflation rates in both countries. Yesterday's dollar plunge and gold leap suggest that markets foresee a higher U.S. inflation rate if the Snow policy succeeds. In Japan, meanwhile, the risk is that a rising yen will send that country back into the deflation it only recently seemed to be escaping.

Regarding China, the argument is that Beijing is manipulating its currency by keeping the yuan fixed at 8.28 to the dollar. But that rate has been fixed since 1994, a period of phenomenal Chinese growth that has benefited U.S. exporters, among many others. While China has a huge trade surplus with the U.S., it has a trade deficit with much of the rest of the world. This hardly suggests a country running a competitive devaluation strategy. In any event, we learned from Japan's revaluation of the yen in the 1980s that currency rates affect trade flows very little once companies and economies adjust.

Currency manipulation can, however, create the kind of instability that produces genuine financial crises. We saw this in the late 1990s, with the Asian crisis triggered by IMF advice to Thailand and Indonesia to devalue. The same trend was also fashionable in the 1970s, with Britain nearly bankrupting itself as it pursued prosperity through devaluation. And let's not forget the glories of the 1930s.

Things got enough out of hand in the mid-1970s that the industrial powers sat down to rewrite the currency rules of IMF members to discourage the practice. The insert above gives a flavor of that advice, as does language elsewhere urging members "to assure orderly exchange arrangements and to promote a stable system of exchange rates." That language, by the way, was drafted by then-Secretary Bill Simon's U.S. Treasury.

It is especially distressing now, on the cusp of a global recovery, to see Treasury repudiating that historic good counsel. The U.S. is the conductor of the world monetary system; if it starts to manipulate currencies for narrow political purposes, all bets are off for the rest of the world. Yesterday's financial Bronx cheer was a warning that Mr. Snow and the White House would do well to heed.

Updated September 23, 2003