Economics-devaluing the Chinese currency[edited title]

I don’t know the actual terminology for this but,
Is the devaluing of Chinese currency actually bad for the American economy?
devaluing isn’t the right word, i mean their ability to keep the yen weaker than the dollar.

No. It gets money in the hands of the people who will spend it. that increases demand and creates a multiplier effect. It is an absolute positive.

Are you trying to get answers for homework problems?
Also, why do all your questions have the same subject line?

Reported all 4 threads.

The yen is the Japanese currency.

I’ve closed the duplicate threads that were made and moved Gonzomax’s reply (from one of the duplicates) into this one.

Tell them how you killed our baby Amanda.

But onto the OP. My understanding is that a weaker Chinese currency makes our exports to them higher priced and their exports to us cheaper, adding to the trade imbalance. But that is all I know about it.

Moved from General Questions to Great Debates, where opinions are welcome.

samclem Moderator

Note that gonzo’s response was to a different question in another thread. I suspect he would answer “yes” to the question asked in this OP.

Keeping the RMB (the Chinese Yuan) weak can be a bad thing for us in certain circumstances: 1) If it creates inflationary pressure inside China, and 2) that inflationary pressure is crushed by repressing demand. The world doesn’t have enough demand at the moment, and if the Chinese are going to depress their own domestic demand, instead of allowing their citizens to buy cheaper foreign goods, then that ain’t a good thing for us.

But in the last many years, the Chinese have in fact been allowing a bit higher inflation, and they are also allowing their currency to appreciate internationally. Even if we should happen to believe that the RMB is undervalued, the problem is getting less and less serious over time.

And yet the complaints about China are getting more and more heated, and less and less fact-based, over time. Chuck Schumer’s office claimed in 2005 that China was “rigging its currency between 15 and 40 percent below its appropriate value”. Well, okay. China has allowed at least a 30% appreciation, in real terms, since that time. What do Schumer and the others say now? “The lawmakers argued China’s currency is undervalued by as much as 25 percent to 40 percent against the U.S. dollar, giving Chinese companies an unfair price advantage and destroying millions of American jobs.” The lower bound of the ‘estimate’ went up, even after six years of currency appreciation. (I got this via Scott Sumner.)

It’s hard to believe this is anything else other than dishonest behavior on the part of the US pols.

China is a red herring, to distract from real domestic issues. Maybe in an ideal world the Chinese should allow even faster appreciation, but the fact of the matter is that they are doing exactly what they were asked to do, at exactly the amount they were asked, and instead of acknowledging that, Schumer and the others have ignored the last six years of data and are just repeating their demands, and even expanding them. Nothing is ever good enough for them.

Meanwhile, not one bloody word about the fact that the US has its own currency. If we wanted to take the situation into our own hands, we need only set a smarter target for the dollar, and that would take care of a a decent chunk of our own domestic employment problems much more quickly. But instead of focusing on the real issue, they search for scapegoats. Sheer lizard-brain tribalism, and nothing else.

A weaker Chinese currency now helps Chinese industry in the long term at the expense of Chinese citizens in the short term. They’re playing the long game, and that is something they specialize in.

It absolutely limits Americas ability to market it’s products in China.

In order to maximize confusion, I have merged four threads on economics by the same poster. I’ll leave it to responders to sort things out.

Colibri
Moderator

And it limits China’s access to the latest technology form outside China, which invariably is high priced, and even higher priced do to a weak currency.

So, we can’t export as much as we would like, but we get to import a bunch of cheap stuff. If the Chinese want to live in crappy conditions so we can have cheap computers and HD TVs, I say let them.

Oddly enough, the Chinese currency (called the Yuan or Renminbi or RMB) has been appreciating as opposed to depreciating. So, the OP will have to figure that one out all on his lonesome.

The Big Mac index, according to my personal experience, shows the yuan is probably about 50% of where it should be.

(A Big Mac is made from locally grown/bought ingredients, and has about the same price and profit structure anywhere in the world; so relative prices of Big Macs should give as realistic a picture of what the exchange rate should be as any other indicator according to The Economist.) A Big Mac in Beijing or Shanghai was about half the price of North America. Similarly, a taxi ride in most of central Beijing was about 20 yuan, about $3. Our 5-star hotel was $US 125/night. The world’s fastest airport shuttle, the Shanghai Maglev, was about $12 round trip IIRC. When’s the last time a major city’s airport shuttle train cost that little? I think it was $50 for the Heathrow shuttle.

The result is that, yes, we buy their products cheap, and the Chinese consumer cannot afford to buy ours. Locally made products have a major price advantage, thus developing their industries. China accumulates huge amounts of currency (US$) which it uses to buy resources and the infrastructure it cannot easily make itself.

China accumulates a huge amount of US$ as savings also, as a result of the trade imbalance. However, of the US total government debt, IIRC the Chinese only hold a small percent - but it is large enough that if they did dump it all on the market, they could cause the value of the dollar to plummet. However, why would they? Their holdings would also be devalued.

China has a tiger by the tail They do not keep the currency lowe to screw the USA. Originally, it was an easy way to develop local industries - give them an edge. However, the production that the US buys is so huge now, and so dependent on the low Chinese currency, that if they did allow it to float, They would price themselves out of the market. We would buy our cheap plastic crap or clothing or electronics from Vietnam or Bangladesh instead; hundreds of millions of chinese would suddenly become unemployed. Unemployment and its discontent is a recipe for unrest - people who are broke have nothing to lose. The Chinese government’s biggest fear is riots and a repeat of Tien Amen - see how hard they cracked down on hints of Arab-spring type protests.

So what can China do - they walk the balancing act between slowly raising their currency and keeping people employed. They hope that they can let the currency creep up by inflation - the exchange rate stays the same, but wages and prices go up a few percent each year. Industry adapts to this change gradually, and in a decade or so (they hope) the currency will be where it should be.

I saw some economic experts saying that the Chinese government will not rapidly cut the value of their money because it not only might slow down their economy, but it might be a hard landing. They have no intention of doing that.

What are the downsides of weakening our own currency, other than higher prices on imported goods?

Hellestal basically nailed it. But you can learn a lot more about the issue from one of my favorite podcasts, EconTalk:

Well, that’s the big one. Of course, it also hurts us when we try to invest outside the U. S., but paradoxically can send a signal that businesses and inviduals should do so. After all, if you think the currency will be forced even lower, then you’ll want to move money out now even if it’s a minor loss on paper.