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China Floats Yuan
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| ShadoWolf |
http://news.bbc.co.uk/2/hi/business/4703477.stm
US greets China currency shake-up
China's revaluation of the yuan for the first time in a decade has been hailed by the US, its top critic on the issue.
The move was widely seen as the first step towards the liberalisation of China's tightly controlled currency.
"I welcome China's announcement today that it is adopting a more flexible exchange rate regime," said US Treasury Secretary John Snow in a statement.
Critics had felt China's fixed exchange rate regime gave its cheaper exports an unfair advantage in global markets.
Mr Snow's statement continued: "As we have said, reform of China's currency regime is important for China and the international financial system."
"The change in China's exchange rate regime announced today represents a move in the direction of greater exchange rate flexibility
Thomas C Dawson, IMF
He said the US would watch China's implementation of its new system, which will see the yuan float against a basket of currencies, rather than linking it at a fixed rate to the US dollar.
China's currency had been pegged at 8.28 against the dollar, but the new move effectively strengthens it by 2.1%, to 8.11 to the dollar.
"The Chinese have now put in place a system to allow their currency to move in tune with the global economy," Mr Snow said.
"It puts China on the right path. The main development is their commitment to move to a market based currency system, based on demand and supply."
Meanwhile the International Monetary Fund ( IMF) said it was ready to "work with the authorities on the continuing evolution for the exchange rate system".
After the announcement the euro came under pressure from a rallying Japanese yen, which rallied sharply across the board - including against the US dollar.
The dollar dropped against several Asian currencies following the Chinese announcement, sinking from 112.50 yen to 110.38 yen, its lowest level since 30 June.
Malaysian move
Criticism had been strongest in the US, where many blame China for the decline of domestic industry.
However the White House also welcomed the move, with presidential spokesman Scott McClellan saying: "We are encouraged by China's announcement today that they are adopting a more flexible market-based currency system."
And Thomas C Dawson, director of external relations at the IMF said: "The change in China's exchange rate regime announced today represents a move in the direction of greater exchange rate flexibility.
"Greater flexibility is very much in China's best interest, as it would provide more room for monetary independence, enhancing the government's ability to manage the economy.
"We would encourage the authorities to utilize fully the scope for flexibility in the new exchange rate arrangement."
In an announcement on state television, the Chinese government said that from Friday the yuan would be allowed to trade in a tight range of 0.3% against a basket of foreign currencies.
However, it did not indicate which currencies they would be.
In a move that seems to be coordinated with the Chinese decision, Malaysia has also scrapped its currency's link with the dollar.
The Malaysian ringgit had been pegged at 3.8 to the dollar since September 1998, in the aftermath of the Asian financial crisis.
Tariffs threat
Malaysia's central bank said it did not expect the currency to deviate widely from its current level against the dollar.
THE CHINESE PEOPLE'S MONEY
People's Bank of China establishes the Renminbi, or people's money, in December 1948. The currency is more commonly called the yuan.
The yuan is fixed at 2.42 to the dollar from 1953 to 1972 - the height of China's Soviet-style planned economy.
China introduces a dual track currency system. The yuan is maintained for domestic use only, while foreigners are required to use foreign exchange certificates.
China adopts current account convertibility in 1996. The yuan trades in a narrow band of 8.28 to the dollar
July 2005: China announces a shake-up in the way it values its currency. It ditches the dollar peg in favour of a basket of currencies.
The Chinese revaluation came a day after US Federal Reserve chairman Alan Greenspan warned that China faced a "very serious" risk to its economy if it did not allow its currency to rise in value.
Senior US politicians had threatened to impose tariffs against China if it did not revalue the yuan.
However despite the warm reactions, some analysts reacted with some caution to Beijing's decision.
"This looks like a very minimalist move," said Mark Cliffe, an economist with ING. "It maybe relieves the pressure from the US with tariffs on the table in Congress but it remains to be seen if it is enough politically and economically."
The shake-up of the way the yuan is valued was "clearly more symbolic than anything else" said John Ip, a senior economist with Morley Fund Management. |
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| Noctone |
| Funny thing, I just read an article in the Atlantic Monthly that was a theoretical look back at the collapse of the American economy, and this was one of the things that helped that happen. :nervous: |
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| Shakka |
| quote: | Originally posted by Noctone
Funny thing, I just read an article in the Atlantic Monthly that was a theoretical look back at the collapse of the American economy, and this was one of the things that helped that happen. :nervous: |
Funny, I thought that the opposite would be the case. Theoretically, this should help the U.S. economy since the Yuan has been a drag. |
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| metalgearsolid |
| now this is what amreican economist believe will help american factories because it will make american products cheaper to buy since chinese goods now are more expensive. I doubt it will work our time as an industrial power is passing. We should just give it up and try to make tech that we won't need any china to buy goods from. |
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| Shakka |
| quote: | Originally posted by metalgearsolid
now this is what amreican economist believe will help american factories because it will make american products cheaper to buy since chinese goods now are more expensive. I doubt it will work our time as an industrial power is passing. We should just give it up and try to make tech that we won't need any china to buy goods from. |
Correct--with the corollary being that the Yuan should now hold greater purchasing power, which should boost U.S. exports to China. It will also make Chinese goods relatively more expensive to import, thus giving a reprieve to companies that have suffered going up against cheap Chinese competition. Further out, in theory, it would aid the "outsourcing" problem as well.
It is worth pointing out that at this point the move is more psychological than anything as they are talking about roughly a 2% move, which probably won't have much of an affect on anything.
It also could be a bane for apparel companies in the U.S. that depend on cheap Chinese textiles as their profit margins will feel the pinch now that the Chinese goods are relatively more expensive.
At least those are a couple of my perceptions. Leave it to Occ to come in and prove me wrong...;) |
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| arnoldjch |
| quote: | Originally posted by Shakka
Funny, I thought that the opposite would be the case. Theoretically, this should help the U.S. economy since the Yuan has been a drag. |
Very true. The other fact that is going to help the American economy is that now we are seeing a soar in interest rates in american banks. This could be bad news for the real estate bubble, because the only reason that american families can buy a home is due to the fact that interest rate have been low in the past years, and now they are going back up. I agree with the decision to raise interest rates, because that would make the dollar a stronger currency in which it has gone down in the past agains the Euro and other currencies. One of the reasons we are having good economic relations with China is because they are basically paying off the war in Iraq for us, also we owe the housing bubble to them, because many american families are buying chinesse products for their homes. Note that in a bad economy interest rates always stay low and in a good economy interest rates are always high.
** I know i got out of topic but i just wanted to share this with you guys. |
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| occrider |
| quote: | Originally posted by Shakka
Correct--with the corollary being that the Yuan should now hold greater purchasing power, which should boost U.S. exports to China. It will also make Chinese goods relatively more expensive to import, thus giving a reprieve to companies that have suffered going up against cheap Chinese competition. Further out, in theory, it would aid the "outsourcing" problem as well.
It is worth pointing out that at this point the move is more psychological than anything as they are talking about roughly a 2% move, which probably won't have much of an affect on anything.
It also could be a bane for apparel companies in the U.S. that depend on cheap Chinese textiles as their profit margins will feel the pinch now that the Chinese goods are relatively more expensive.
At least those are a couple of my perceptions. Leave it to Occ to come in and prove me wrong...;) |
Eh you're pretty much spot on. I would definetely agree that there's not much tangible effects that are going to happen since the yuan is still a pegged currency. Instead of only being pegged to a the dollar now it has some variability since it's pegged to a basket of currency, but it's still pegged. As for the cons, Chinese monetary policy is no longer intricately linked to the Federal Reserve's decisions. Meaning that the Chinese Central Bank no longer has to buy treasury bonds in order to maintian its peg to the dollar. Meaning that the days of China financing our twin deficits may be approaching an end sometime in the next decade or so when they actually float the Yuan. Already you can see a rise in the yields of the 10-year T-note as Chinese reliance on purchasing US treasuries decreases.
So in other words ... it's an indication of big news to come in the future, but it's not really news now, it's been a move long anticipated for a while actually.
| quote: |
Note that in a bad economy interest rates always stay low and in a good economy interest rates are always high.
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That's not always true. Nominal interest rates are merely a tool of monetary policy used by the Fed to smooth the business cycle. Generally in a booming economy the fed raises interest rates to avoid inflationary growth, while in downturns the fed lowers interest rates to provide economic stimulus. However, interest rates are hardly synonymous with a good or bad economy. Just look at the Japanese economy with has been sputtering for several years. They've been holding their interest at rock bottom levels with the hopes of stimulating their economy without much effect in the late 90's early 2000s. Or simply look at the US in the 70s when Volker took control fo the Fed. The economy was stagflating and in order to combat inflation Volker had to raise interest rates through the roof despite the fact that the economy was in the ter. And that was just nominal interest rates ... I'm sure the real interest rate was much much higher. |
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| arnoldjch |
| quote: | Originally posted by occrider
However, interest rates are hardly synonymous with a good or bad economy. |
You have to look at consumer spendings, gains in net worth, and accommodative conditions in credit markets. Also you have to see if Households have recorded a modest improvement in their financial position over this period. |
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| occrider |
| quote: | Originally posted by arnoldjch
You have to look at consumer spendings, gains in net worth, and accommodative conditions in credit markets. Also you have to see if Households have recorded a modest improvement in their financial position over this period. |
So when interest rates peaked in the early 80s, the economy was officially in recession, and unemployment was close to 10% the economy was doing well? :conf: You do know that nominal interest rates lag economic performance right? And you do know that the Fed sets interest rates with inflation in mind first and the state of the economy second right? |
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| arnoldjch |
| quote: | Originally posted by occrider
So when interest rates peaked in the early 80s, the economy was officially in recession, and unemployment was close to 10% the economy was doing well? :conf: You do know that nominal interest rates lag economic performance right? And you do know that the Fed sets interest rates with inflation in mind first and the state of the economy second right? |
Dude the U.S economy was doing great in the 80s:rolleyes: http://david.snu.edu/~dwilliam/f97p...abloid/80s.html please check your facts. How can nominal rate lack economic performance? a nominal interest rate is the period interest is credited, how is that bad?:rolleyes: thats just a method that creditors and bank use when they lend money, the nominal interest rate is the money received by the lender, the profit they make. |
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| occrider |
| quote: | Originally posted by arnoldjch
Dude the U.S economy was doing great in the 80s:rolleyes: http://david.snu.edu/~dwilliam/f97p...abloid/80s.html please check your facts. How can nominal rate lack economic performance? a nominal interest rate is the period interest is credited, how is that bad?:rolleyes: thats just a method that creditors and bank use when they lend money, the nominal interest rate is the money received by the lender, the profit they make. |
Please check my facts? Are you a ing retard or something? For 's sake, your reading comprehension is for to start with. I didn't say nominal interest rates lack economic performance, I said nominal interest rates lag economic performance. How other way would it be done genious? You think the Federal Open Market Commitee meets in the future to discuss what they should do with interest rates in the present?? What's sad is that you probably don't even understand how the FOMC adjustment to the discount rate and the federal funds rate affects interest rates set by banks. Given that you probably have no ing education in the field of economics I can forgive your ignorance of the lack of knowledge that the US was in a RECESSION in the early 80’s, but the fact that you brazenly pretend that you know jack about economic history and call me out on it pisses the out of me. First of all, what your pitiful excuse for a source failed to tell you was that while the US economy rebounded in the mid to late 80's (until 87 to be exact ... then it went into recession) the economy was in a deep recession in the early 80’s. Not only deep recession, but remants of the 70's staglation where inflation was high and the economy was in recession. This resulted in high interest rates, high unemployemnt, and high inflation.
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By early 1982 Reagan's economic program was beset with difficulties. The nation had entered the most severe recession since the Great Depression. In the short term, the effect of Reaganomics was a soaring budget deficit. Government borrowing, along with the tightening of the money supply, resulted in skyhigh interest rates (briefly hovering around 20 percent) and a serious recession with 10 percent unemployment in 1982. Some regions of the "Rust Belt" (the industrial Midwest and Northeast) descended into virtual depression conditions. Only inflation was immediately curbed by Reagan's fiscal programs.
http://en.wikipedia.org/wiki/Histor..._United_States_(1980-1988)#The_recession_of_1982
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So kindly know what the you are talking about before you arrogantly try calling me out on something I do for a living. Thanks. |
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| Dupz |
Firstly, occrider is right about the US economy in the 80's..
Secondly, I'm a bit worried by the fact that China is still fixing it's exchange rate on a basket of currencies, rather than just the US. Isnt this just moving between inefficient systems, and not really improving anything? If you're going to change the system, float the yuan completely, like Australia did in 1983.
Now, is this good for countries like Australia. Well..... consumers here have to pay more for an imported good from China, but producer gain from not having to compete with such cheap products coming from overseas. Will the producer gain outweigh the consumer loss? I dunno.. |
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