Let’s say Switzerland doesn’t want Swiss francs tradeable on the world market - can they take it off? How would the value/exchange rate then be adjusted?
Taking it off the market involves forbidding the currency’s export and import, and a few countries do that. But I don’t think you can forbid trading in the currency if you allow it out of the country.
Lots of communist countries used to make it illegal to import or export their currency. The exchange rate is set at whatever the government decides it should be set, and it is illegal for anyone other than the government to trade currency. If you want to visit the country you are required to buy the soft currency at whatever exchange rate the government sets.
The problem then is the government can’t pay for imports with the domestic soft currency, because that would require allowing foreigners to hold and exchange the currency. So all trade has to be conducted with foreign convertible currency. And so if the Soviet Union needed to import wheat they’d have to buy wheat with dollars or pounds or deutschmarks because they couldn’t pay in rubles. And exports would be sold for hard currency as well.
Lemur866’s analysis seems right on. I think China continues to peg its currency at a rate that many consider artificially low, in order to make its exports cheaper.
Note that if a country actually took its currency off the market completely, there would be no exchange rate. Presumably any transactions would have to be conducted by barter.
What *does *that mean? Any why is it bad? Is it the same as offering a universal subsidy to exporters?
It means that foreigners who buy Chinese goods get a discount, while Chinese who buy foreign goods must pay a markup. It encourages export industries at the expense of chinese consumers.
It’s more like offering a universal subsidy to consumers in countries where you’re exporting stuff. Because the yuan is held down, your dollar buys more Chinese stuff then it naturally should.
That makes it twice as economically beneficial for American (or any other foreign) companies to manufacture their sporting goods or circuit boards or whatever in Chinese factories.
The downside is that imports are astronomically expensive, but China is mostly self-sufficient so they don’t care.
Thanks. How are they doing it?
By buying US Treasury bonds, and thus boosting the value of the dollar. The US government won’t do anything to prevent it because, 1) the Chinese have already got a ton of Treasury bonds, and if they were angry enough they’d flood the world market with them and effectively render the dollar worthless, and 2) it lets them keep on deficit spending.
I should note that 1) will never happen, because the Chinese would be rendering all that foreign exchange they’ve built up worthless, and making it almost impossible for US businesses and consumers to buy Chinese products (or any imports).
It’s part of the reason the US trade deficit with China is so large. Were their currency allowed to float, their goods would become more expensive to us. We would buy from other countries instead, or manufacture more goods within the US.
As noted, this is thus also part of the reason why China can afford to buy so many US T-bills, because of all of the dollars flowing in to buy their exports. RNATB, I think China’s ability to cause havoc by dumping those T-bills in large amounts is limited in practical terms by the fact that they would be hurting themselves in the process (it would amount to selling their assets cheaply).
I don’t know the actual mechanism of the currency peg. I assume there are legal restrictions on who is allowed to trade in currency within China, and the rates at which they can do so.
The yuan/renminbi isn’t pegged to the dollar anymore. They floated the yuan in 2005.
Ah, OK. But it still doesn’t float freely, does it?
Again, thanks.
Is there a separate mechanism from buying T-bills? Seems that I hear people are squicked out by China’s pegging their Yuan to the 'merkin something or other (I’m running out of ideas here). That seems different than complaining that China is buying up open-market commodities.
It used to be pegged to the dollar. When you peg a currency, you basically agree to let the other country dictate your monetary policy- if they drop interest rates, your central bank does the same, and to freely exchange your currency for the pegged one. It’s not an ideal situation and it hampers economic growth usually, but it also makes things stable. That is, unless your economy is growing at a drastically higher (or lower) rate than the one supporting the currency you peg to.
Most of the Arab currencies used to be pegged to the dollar or sterling. I think most of them have gone off that, though.
You can see the danger of pegged currencies in the current economic meltdown in Argentina. Good story here (bit technical).