by Marko Marjanović (author of the new Checkpoint Asia site) for The Saker blog
For decades now China has kept its currency undervalued to the dollar and the US and China have both acted as if this was a boon to China. It is anything but.
Yes, by keeping the yuan low China makes it easier for its good to compete on the American market, but only at the cost of leaving money on the table in every trade. What artificially undervaluing yuan really does is it artificially increases the purchasing power of American consumers and decreases the purchasing power of Chinese consumers.
If yuan is artificially undervalued by 20 percent it follows that an American import company looking to buy goods in China to sell on the American market is able to get 20 percent more than it would be able to in full market conditions. What this means is that the Chinese government intervenes in the market to make Americans better able to outcompete domestic Chinese consumers in the market for China’s own goods.
How in the world is that beneficial? Now, it is true that undervaluing your currency is part of the standard East Asian development strategy previously also used by Japan, Taiwan, Singapore, Hong Kong, and South Korea to successfully develop their economies, however it does not follow from that that every aspect of that strategy is beneficial. To develop one does not need to get everything right, but just a few things. And to race ahead of others one only needs to get more things right than the others. For sure, China has gotten many things right, but pegging yuan to the dollar at an artificially low rate is not one of them.
With a free-floating yuan that was allowed to appreciate to its real market value the Chinese would get to enjoy more of what they produce themselves (ie would enjoy a higher standard of living), and the profits in trade would not be affected a great deal at all, because the reduced volume of Chinese goods which was still going to the US would command a higher price, that same price which they command in yuan.
Instead we have the situation where a developing country has been for the longest time subsidizing consumption in one of the wealthiest. Obviously this does not hurt the Americans. They save money by buying the cheaper, Chinese-government subsidized goods and have that much more money left over to spend on other services and goods which are not sourced from China.
I can’t dig up the source now but I remember reading China a few years ago was subsidizing an average US household to the tune of $800 a year. That amounts to well over $100 billion a year. In fact because a currency undervalued to the dollar is by necessity also undervalued to every strong free-floating currency, such as the euro and the pound, this means that China has been likewise subsidizing Europe to the tune of another $50 billion at least.
What has been its reward?
Its reward for imposing austerity on its citizens and transferring the fruits of that to the Western World, allowing it $150 billion a year in savings that can be spent elsewhere, has been that it is demonized as an economic foe.
By raising the tariff wall Trump is threatening to make it impossible for the US consumers to benefit from Chinese-government subsidies. (Instead the subsidy will be collected by the US Treasury.) However that is really something Beijing should have beat him to.
Trump tariffs are a blessing. China should stop chasing after dollars whose value Beijing artificially overinflates, and which in view of the budgetary demolition derby engaged in by Washington needs constant propping up by the Chinese. Instead China should simply allow the yuan to float and therefore appreciate in value to the dollar. This would instantly transfer over a great deal of purchasing power to the Chinese consumer market making it far bigger. For China this would cover any tariff-driven losses, while the US would find it is having to suddenly pay far more for its Chinese goods and components. First to pay for Trump’s tariff, and then to cover the dollar appreciation to the yuan.
The real bonus would be however, that a free-floating yuan would be a far more credible candidate for a currency of international trade. China has tried hard to internationalize yuan, but with little success, because the fact that yuan is not even a real market currency, but just a dollar copy has naturally hamstrung its efforts. To become accepted, yuan first has to prove its stability on the market as a free-floating currency decoupled from the dollar — which as a currency that is actually artificially undervalued it easily could.
And that takes us to the next harmful oddity of the link to the dollar. Poor countries dealing with heavy inflation often peg their currencies to a stonger western currency because this represents a commitment that they will henceforth pursue hard money policies (at least as hard as the managers of the currency they’re pegging to). However for China whose finances are in far better order than those of the US it is absolutely insane and harmful to link itself to the kamikaze dollar.
With the US debt exploding and so much monetary expansion going on China can only maintain the peg by either propping up the dollar or destroying the yuan. So far it has done a little bit of both. Until 2008 it mainly kept the yuan and the dollar in the same range, by locking up $3 trillion of US debt in its coffers, and since 2008 it has gradually come to follow the US in its policy of “injecting” new money into the economy.
By conventional wisdom albeit these “injections” hurt the currency they are good for the economy. This is nonsense. Logically creating more currency does not create an economic good, it merely redistributes the existing purchasing power in the market of that currency.
The myth endures because it is convenient for governments and their supporters. A government which can create money out of thin air (usually by unbacked lending) is far more powerful in relation to the market and its citizens than one that cannot, and is not constrained by budgets or revenue — right up until it thrashes the currency and becomes totally impotent.
In fact, decoupling availability of credit from the level of capital savings in the economy makes reliable economic planning on the market impossible leading to boom and bust cycles. Far from a downside, it would be a good thing for China to abandon money bomb policies. Luckily Beijing is nowhere near as far down this road as the US is, and could do so much more easily.
So by ending the dollar peg and reconciling itself to an appreciating yuan China would finally:
— End over $150 billion in yearly subsidies to Western consumers
— Boost Chinese living standards by over $150 billion in yearly spending
— Eliminate the need to spend (or hold) trillions in US treasuries to prop up the dollar
— Eliminate the need to mimic US currency-depriciating policies
— Set the yuan on the path to displace the dollar as the currency of international trade
Imagine a world where the US can no longer willy-nilly sanction anyone it pleases. A world where unilateral US sanctions on the poor “rogue” nation of the day merely mean that America is cutting itself off from them, but they can still freely trade with everyone else because all of that happens via Chinese banks.
Imagine a world where the Empire is actually again constrained by US revenue. Where it can no longer run deficits of any size it damn pleases. Imagine a world where the US actually has to pay for its imports with exports because nobody is in a particularly urgent need of its paper.
This is what I’m talking about. A free world. But I guarantee you it won’t happen for as long as yuan remains a second-rate copy of the dollar, no matter how actually undervalued. Beijing needs to let yuan grow up and enter the exchanges without the presence of its overbearing commissar parents.
It is the currency of the the largest exporter, with the largest trade surplus, and the largest reserves. It will do well. Why are we still trading in and accumulating the currency of the country with the largest deficits, largest debt, and last able to finance its humongous imports? There is no need. We have something much better, if only Beijing can stand to let go off some of the illusion of control. If Trump pushes it to do so we should build him a monument.
Marko Marjanović is the former deputy editor at Russia Insider of four years. Before that he ran a blog on Eastern Europe for five. He now publishes the news site Checkpoint Asia which serves delicious Empire hatred.
In my mind the empire has pushed the world into a corner. And it is being given two choices: give me your money or fight. It seems to me the world is preparing to fight.
Wonderful article, thank you.
Well argued. I believe the author is right, the Chinese have been too timid by coupling the currencies and worried about unemployment. I hope they do as the author says.
@ spangler
Not necessarily ‘timid’. Both Russia and China, in leading the world towards a multipolar world and away from the US uni-pole, have made a master class of timing, weight and scale of action. Sure, 3 trillion of US treasuries in China is a massive gun to Americas head, but it is also the greatest reason why the US must tread carefully. Shot off ‘to show em’ is precisely what the US would do, and precisely what the US wants China to do also. Not wise.
The Russians trod exceedingly cautiously, judiciously in Ukraine and Syria and we should all be thankful for that skillful weighting, scale and timing of those actions. China likewise in the economic sphere. Precise actions with a measured outcome that fall short of giving the US the excuses it desperately wants for escalation. Because we are all aware now that the US thinks it is a gunslinger in a western and that given sufficient excuse it will fire willy-nilly in the high street like the jerks glorified by Hollywood.
Slowly, softly China. Ease the US into the rocking chair. Gently as she goes.
I agree, softly, slowly. No rash moves that could be spun into “agression”. China must also make sure there is a replacement market for its goods. That is not created over night. But the Belt and road is on the way. When that is matured, then China may stop subsidizing USA.
The USA will bully the entire world in its efforts to ‘ .. bring China down’. The Chinese will simply power away in science and technology, training so many more experts that the USA and investing so very much more in infrastructure and scientific and technological material and institutions. If the USA decides to cut itself off from Chinese scientific and technological collaboration, in a desperate effort to perpetuate its Exceptionalist Empire, then it will only hasten its own long overdue and richly merited demise.
This was an issue not so long ago, and Trump paraded the currency war flag, the Chinese did nothing, and nothing came of it, don’t know why or the significance of the peg, perhaps it would have devalued their debt in dollars and the leverage they enjoy(ed) with that mechanism.
to Kent
your present of May 9th is traveling with my soul
https://www.youtube.com/watch?v=DeZL2FXkGqI
I want to thank you for it, traveling into infinite time
mundo
Marko is spot on.
Its past time for China to ditch the training wheels of the US dollar and float the yuan and create a crediable and viable alternative to the fiat US dollar.
This will allow Chinese banks to act as an alternative to US banks when executing global transactions, thereby depriving the US of this privilege, which to date, it has abused.
China’s policy of not interferance in the internal affairs of other countries means it would not be inclined to incur the hubris and arrogance of the US in inserting itself everywhere.
Unleash the yuan!
Bravo Marko!!
Selah
Marko Marjanović completely ignores one important point in this otherwise accurate article. Allowing the Yuan to float freely would decrease the costs of imports for Chinese consumers, adversely affecting sales of locally produced goods. He does not seem to understand the Chinese attitude towards foreign produced goods, which most Chinese, perhaps justifiably, consider far superior in quality to domestically produced goods. It is inaccurate and misleading to say that a stronger Yuan would allow the Chinese to consume more of what they produce. A stronger Yuan would allow them to consume more of what the rest of the world produces. Perhaps he is unaware that Chinese people with money are willing to pay considerably more for a BMW produced in Germany than a locally produced BMW. Floating the Yuan would tighten the gap in price between these choices significantly, leading to more purchases of German produced BMWs, household appliances, you name it. This would benefit Chinese consumers, just as Trump’s increases in import duties on Chinese goods, if they ever go through and make their way to their final destination (American consumers’ costs) will gut the American
middle- and lower-class consumers by raising prices by 15% – 25%.
Sua análise tem alguma base se referida ao passado chinês de uns 25/30 anos.Mas agora, já se foi o tempo em que os chineses faziam produtos de qualidade inferior e preço baixo apenas para ganhar mercado. Hoje a China domina tecnologias de altíssimo padrão (5D, painéis solares, computadores, engenharia, sem contar com o complexo e eficaz software de controle de carregamento dos containers em seus portos.
Google translation,MOD:
Their analysis has some basis if it refers to the Chinese past of a 25/30 years. But now, the time is already gone when the Chinese made products of inferior quality and low price only to gain market. Today China dominates high-end technologies (5D, solar panels, computers, engineering, not counting on the complex and effective software to control the loading of containers in its ports.
@ zanforlin
Agreed. They also surpass the US in patents registered.
Interesting article; thank you for sharing it.
I find a few basic premises questionable, no more than to the extent that they are still nominally accepted, yet most people know that they are false.
“free-floating yuan“, I suggest that there is no such thing as “free-floating” currency exchange rates, that global finance/oligopolistic currency traders manipulate the markets, which to a large extent are abstract, anchored to no “physical-reality” determinants.
“yuan is artificially undervalued by 20 percent“, “How in the world is that beneficial?”
Development of economic infrastructures.
Accumulation of fantastic amounts of debt assets; so while there were subsidies to Americans, ultimately the Americans bereft of genuine domestic economic productivity (since it was all off-shored… to China), still didn’t have the money to buy the products, thus took on debt, ultimately financed by … China.
Now China is selling off that debt, probably at a loss, but making it back up again in using the money to purchase gold at a aggressively purposely artificially undervalued rate*.
* undervalued to maintain the fiat petro-dollar global dominance
Now the empire is collapsing, and very soon, the consumers, the 99%, won’t be able to afford even the artificially undervalued prices for Chinese products.
China, on a gold buying program which is unlikely to diminish for a while, will develop its alternative markets, with baked-in Chinese primacy, and emerge with a gold-backed currency, and no need for shoddy products from the third-world former hegemony.
Now China can afford to agree to a controlled upward valuation of it’s currency, according to a timing schedule which fits its emerging BRI development and gold acquisition program.
But one way or another, economically, China holds many cards, and the empire is running on fumes, which seem to have cognitively disabled the ‘leadership‘.
The big challenge for the axis of resistance is keeping the emasculated empire’s population and institutions adequately afloat to avoid global consequences from the unrest blowing beyond the empire’s borders.
“China has kept its currency undervalued to the dollar “?
The RMB is dynamically valued against a basket of China’s trading partners’ currencies and, since US-China trade is below EU-China trade and ASEAN-China trade, the US$ does not have as much weight in the basket as the US might wish.
After the Great Financial Crisis Zhou Xiaochuan, Governor of the Bank of China announced, “The world needs an international reserve currency that is disconnected from individual nations and able to remain stable in the long run, removing the inherent deficiencies caused by using credit-based national currencies.”
He proposed the Special Drawing Right, SDR, which derives its value from a dynamic basket of dollars, euros, renminbi, yen and pounds sterling. American Nobelist C. Fred Bergsten was supportive of Zhou’s project, “Washington should welcome initiatives put forward over the past year by China to begin a serious discussion of reforming the international monetary system.” Fellow Nobelists Robert Mundell and Joseph Stieglitz added, “The creation of a global currency would restore a needed coherence to the international monetary system, give the IMF a function that would help it to promote stability and be a catalyst for international harmony.”
China then made its point by valuing the RMB against a basket of dollars, euros, yen and pounds sterling to demonstrate its stability and predictability and the RMB has been both steady and fairly valued ever since. Have you noticed that all complaints about RMB valuations have fallen silent? After that convincing demonstration,
• In 2014 the IMF made its first SDR loan.
• In 2016, the World Bank issued the first SDR bond.
• In 2017 Standard Chartered Bank issued the first commercial SDR notes.
• In 2018, central banks were stating their reserves in SDRs.
Do you see a pattern here?
Thanks for this info Godfree…I agree that China has no interest in the renmibi replacing the dollar as the reserve currency…the Chinese are far too smart for that because every sword has two edges…and the US is yet to feel that other side, as it inevitably will…
The problem with having the reserve currency is that you are financializing world trade, which should be about industry, not the shell game of finance capitalism…
This article is ridiculous and makes no sense…the US is imploding due to its unsustainable imperialism and Ponzi economics…as it crashes to earth it will hurt many others…China is preparing to protect itself from flying debris…
This is a bilateral argument though, yes? As the European QE nightmare deepens there will be a huge flight of European capital into the ‘safe haven’ of dollar-denominated’ instruments, but primarily the US stock market.
“The real bonus would be however, that a free-floating yuan would be a far more credible candidate for a currency of international trade.”
Well, yes and this is no small thing. But again, not simply as a currency of trade settlement, but as a haven currency. While we can bemoan and lament the unfairness of the Triffin Paradox and the world-subsidized prosperity America enjoys, flights to safety are not moral exercises. They are more akin to indiscriminate stampedes. Negative interest rates on the Continent feed a self-fulfilling, ever-rising US stock market oblivious to fundamentals.
After his 1978 trip to Japan, Deng Xiaoping opted to emulate the Japanese export model, unleashing massive deflation onto the planet. The CCP has never been in the business of repatriating Chinese overseas profits (and raising the value of the yuan) for self-preservational reasons: prosperity brings with it increasing cries for plurality. The CCP had little interest in building the domestic demand side of the equation. The Chinese worker was thus kept on a hamster wheel (and the world was denied an offsetting export market).
“Its reward for imposing austerity on its citizens and transferring the fruits of that to the Western World, allowing it $150 billion a year in savings that can be spent elsewhere, has been that it is demonized as an economic foe.”
The CCP’s reward for imposing austerity was that it remains in uncontested power today. Now, whether there exists a renewed urgency to get the Eurasian Century underway in a hurry and supplant the crown jewel of any export market (the US), that is certainly a process underway in earnest. Collapsarians should note that 25% of global GDP is still earned in the US. So it is a big market to get cavalier with at this juncture.
In a June 2018 Bloomberg article, Yu Zhi, an Economics professor from Shanghai University of Finance and Economics said this:
“Has China completed the task of ‘getting rich’? Has China completed the primary stage of socialism as Deng Xiaoping described? Can you begin to compete directly with the United States and other Western countries?” Yu wrote. “China should rethink its general strategic direction.”
I agree with Yu. This Trade War came a tad too early for China. You don’t let go of a big fish until you have another big fish well in hand.
@ domino
‘25% of global GDP is generated by the US’
I have always wondered what proportion of that is directly tied to US hegemony. How much does the US generate from non-productive finance, specifically US banks skimming a margin off the 60+% of global trade forced to pass through the dollar banking system. And what percentage is ill gotten, namely the very large margins to be got from the theft of resources facilitated by military intervention. And further, what % of that 25% is military spending. And further, what % is generated by the sale of debt to a dollar dependent world which allows for disproportionate domestic largess?
Because comparing the US as a contributor to global GDP against productive economies that have none of the vast advantages of a reserve currency status is not a fair comparison. After all, retaining this inequality is what the US kills millions of innocents for, such is its importance.
At its core that 25%, the unfairness of it, the redistribution of that advantage among a basket of currencies is what this whole arm wrestle is about, no? It will reduce to say 4% if the US loses, the remaining 21% redistributing around the globe.
That 25% jealously and violently guarded by the US is an injustice that is holding the entire world back from development, intelligent long term investment, innovation, peace, a full belly.
That economic parasitism enforced by aggression and genocide through both the Pentagon death-machine and the economic hit-men of ‘The Washington Consensus’ of the IMF, World Bank, WTO etc, doesn’t benefit ‘the USA’. It benefits the ruling parasitic elites of the USA and the West, plus a few compradore vermin in the rest of the world. We live in a Hellish situation where the eight richest parasites control more wealth than the bottom 3.7 billion human beings. And in the USA itself, tens of millions live in poverty, many even while working several jobs, the media male wage has stagnated for decades, millions are addicted to opioids peddled by one family, the Sacklers, infrastructure crumbles, education is a disaster zone, massacres and police killings occur regularly, more people are locked up, for profit, than anywhere else, mass culture is debased, vulgar and highly exploitative, tens of millions have no or just junk health insurance, millions are homeless, streets awash with human faeces-and this sordid mess dares declare itself the envy of the world, and seeks to forcibly compel all others to follow its example.
O argumento expresso nesse excelente artigo é fundamentalmente reflexo dos princípios da Escola Austríaca. O mundo não foi feito ontem para os chineses (5000 anos de história), não se apressam em agir (o que não quer dizer que não tenham perdido algum tempo nesse ” pegging yuan to the dollar”), no tempo deles, os chineses chegarão lá.
Google translation,MOD:
The argument expressed in this excellent article is fundamentally a reflection of the principles of the Austrian School. The world was not made yesterday for the Chinese (5000 years of history), do not rush into action (which does not mean that they have not lost some time in this “pegging yuan to the dollar”), in their time, the Chinese will arrive over there.
“What artificially undervaluing yuan really does is it artificially increases the purchasing power of American consumers and decreases the purchasing power of Chinese consumers.
&
What this means is that the Chinese government intervenes in the market to make Americans better able to outcompete domestic Chinese consumers in the market for China’s own goods.”
Chinese people are paid in Yuan, and americans are paid in dollars (zionazia has not yet instituted a change from dollars to shekels). Low Yuan/high dollar makes Chinese goods more affordable in the usa, while making american goods more expensive in China. This encourages americans to buy Chinese and Chinese to buy Chinese.
I believe there are several fallacies in the article. First, in terms of Purchasing Power, the cost of goods in China is roughly equivalent to the same goods in the USA. What this means is that 100 RMB will get you the rough equivalent in China as $100 in the USA – and if you know where to shop, frequently a good deal more. When the author makes the comment: “What artificially undervaluing yuan really does is it artificially increases the purchasing power of American consumers and decreases the purchasing power of Chinese consumers.” it applies mainly to US and other foreign made product. As most goods are made in China there are perfectly adequate local made product for their needs at substantially lower costs in RMB/$ ratio.
Second, if the Chinese allowed the RMB to float against the USA dollar the lower cost manufacturing niche would be filled by other countries – like India – which would cause China to lose a strategic position in the US economy – that of main goods producer and chief banker (think US treasuries). The result of the current setup is a symbiotic relationship where the USA trying to extricate itself from this relationship is painful. The USA is right now experiencing this as China responds with crushing jabs to the agricultural underbelly of the USA even as the US raises tariffs that are eventually paid for by the US consumer. To the Chinese, the most important point about this current relationship , is the ability to sunder it at the moment of maximum impact/greatest need to effect the maximum impact on a warlike nation for minimum destructive effect. In order to do this, the old maxim of ‘keep your friends close, and enemies closer” applies.
Lastly, with respect to the comment: “Set the yuan on the path to displace the dollar as the currency of international trade”, well this is already happening albeit slowly by setting up an oil bourse in RMB, and the large scale purchase of gold by the Chinese government. It should not come as a surprise that shortly after the Chinese government set up an oil bourse in RMB and started dealing directly with Saudi Arabia in RMB that the trade war ramped up. From a 20,000 foot view the process is started but the progress is slow until the collapse of the USA is more pronounced. It’s not easy managing the fall of an empire and there are very few countries in the world as experienced at this as China.
Very helpful comment. Thanks Jack
Author wrote in P 14 or 15:
Logically creating more currency does not create an economic good, it merely redistributes the existing purchasing power in the market of that currency
…..
Author does not understand fundamental economics. What he wrote above is wrong. If the money or credit created is used to create value (housing, consumer goods) or especially value that creates or assists in creating value (infrastructure, needed machine goods, factories) it is not inflation especially when the value created is worth more than the money or credit created! That money creation adds value to the economy and raises the wealth and living standard of the country.
Such national monetary policy is called “economic dirigism”. It is done by the national bank.
The money creation in USA is done for money lending and siphons OFF value from the economy to enrich the banking cartel class. The USA does not have a “national” bank.
This is why the USA and China have two DIFFERENT economic systems, as different as capitalism and communism are thought to be.
Saker, Please post real economists like Michael Hudson not neoliberal ones. I am sure author means well especially suggesting new monetary policy for China, but…
BTW, letting Yuan float has implications for entire world. Not sure what it would do. Chinese people already have a rapidly rising standard of living. If it aint broke, …
Author also wrote, also wrong:
In fact, decoupling availability of credit from the level of capital savings in the economy makes reliable economic planning on the market impossible leading to boom and bust cycles. Far from a downside, it would be a good thing for China to abandon money bomb policies
David
You write, “If the money or credit created is used to create value (housing, consumer goods) or especially value that creates or assists in creating value (infrastructure, needed machine goods, factories) it is not inflation especially when the value created is worth more than the money or credit created! That money creation adds value to the economy and raises the wealth and living standard of the country.”
Nonsense.
Creating new currency out of thin air does not create value at all. It creates no houses and no consumer goods whatsoever. None. Nothing. Nilch. Nada! What it does do is provide a major advantage to the early holders of the new currency- that is the counterfeiters gain value at everyone else’s direct expense. They are able to purchase goods and services without contributing value themselves. They exploit a fraudulent scheme to acquire something for nothing. They gain value from everyone else’s losses. Further, the creation of the new currency wrecks price discovery, eventually rendering it impossible and that in turn makes logical planning an impossibility. It sets in place a vexation analogous to the Socialist Calculation Problem, one just as insolvable.
What you have also left unaddressed is this. He who gains the new currency early gains purchasing power without producing anything for it. He ends up being able to out-compete others bidding for ownership of goods and services. He gains them and in doing so he bids up prices. Alternatively, he may make his gain by lending the new currency to peons who become indebted to him as they partake in the bidding up of prices. In either case, he gains value yet provides nothing productive whatsoever. The bubbles in property (I assume you are referring to real estate with this term) and equities and medical costs and education costs and automobiles etc etc etc etc etc are the result. Bubbles are destructive. Inevitably they impoverish the vast majority of the people. They do it on the way up and they do it when they collapse. Boom and bust. Destroy.
By the way, in economics the term “inflation” refers to the process of increasing of the currency supply. Inflation is not the subsequent price rises and bubbles. It is the cause of them. Currency and debt creation out of free air is inflation.
Final point. When you write, “…..money creation adds value to the economy and raises the wealth and living standard of the country”, you are making the big assumption that conjuring up currency (pieces of pretty coloured paper with the pictures of crooked political heroes on them) provides wealth for a population. If indeed it did, if what you assert were true, then the elimination of poverty would be simplicity itself. All that would be required would be to print up enough currency so that everyone would be rich… After all “money creation adds value to the economy and raises the wealth and living standard of the country”. Helicopters, Ben, we need more helicopters!
Marko, excellent article. The tariffs are nothing but money grabbing move. They are intended to increase the said 20% by the amount of tariffs in order to give more to the US economy. While some media is trumpeting Tump’s successful improvements to American economy: I ask what improvements where are they, show me? On the top of that the flood of Chinese everywhere in the West is nothing but an underhanded method of West’s payment for the West-China trade. Otherwise the sabre rattling is nothing but a show for the benefit of the public.
Marjanović thinks like an Anglo.
Which does NOT mean, you should hurl excrement at him, and maybe start gathering kindling.
It means you should try to think like a Chinese.
The Rmb/yuan is a political tool not an economic one. Economically it makes no sense for China to devalue their currency: They reduce the purchasing power of their workers & have to pay a higher price for their imported commodities. Not to mention a massive real estate bubble which will be very painful when it pops.
The ultimate objective is the internationalisation of the Yuan with the eventual goal to displace the USD. They aren’t there yet… It is important that China maintains and increases trade volume even with this current trade war and regardless of currency fluctuations. When the world sees that China is committed to trade regardless of the cost to itself, the world’s central banks will continue to accumulate Yuan. Displacing the USD will be a very difficult task. In the meantime, every chinese workers is taking a hit with their purchasing power in order to rid the world of the USD. Thank you Chinese worker!
Answer to your last question why? China is till a developing nation with at lest 8 to 10 years more before reaching “developed” status.
China knows its place in the world. Even if the US were to collapse economically now, its place will be taken over by a growing economically multi-polar world consisting of the BRI countries. And not by China alone.
I don’t agree.
The devaluation of the Yuan gives time for China to develop its manufacturing capability.
Once China develops high-quality products with amazing quality controls, then yes it can float its currency.
But so far the quality is not on par with the EU, Japan and even the US. To develop a culture of quality control leadership takes a few decades. And I can argue that China lost a decade in concentrating on cheaper goods mindset.
Once the CCP pushes the quality agenda, they need another 5-10 years before opening up.
As for the US, the longer this last the more manufacturing capabilities are lost. Thus weakening the empire and giving a breather room for smaller countries that are constantly under threat of sanction, regime change and military interventions.
great article If only China would do this ! I am an american but ashamed of the USA bullying and racism toward other countries !
The Author forget one major thing, China is looking to go to the gold standard when the time is correct
that is why the Yuan is not fee floating yet, they are waiting for the US to implode
also let’s not forget the dollar is backed by the traitor Arab countries (petrodollar) and that needs to stop
the real power is with the oil produces mainly the Arabs
China only controls trade and the US controls the finances due to the petrodollar
Like other do-it-yourself Americans I purchase many “tools” from the local Harbor Freight outfit. My understanding almost all of Chinese mfg. Hand-tools, battery-powered drills and saws, generators, inverters, welders, compressors, etc are excellent (vs a decade ago much of their stuff was poor design/quality). I would prefer to “buy American” but how?
Marjanović writes: ‘Instead China should simply allow the yuan to float and therefore appreciate in value to the dollar. This would instantly transfer over a great deal of purchasing power to the Chinese consumer market making it far bigger.’
At /are-trump-tariffs-the-wake-up-call-china-needs-to-stop-subsidizing-the-us-unchain-the-yuan-and-bury-the-dollar/#comment-647517 Frankie P. follows Marjanović argument for ‘appreciation’ of the Renminbi but doubts that this will lead to the assumed shift to domestic consumption: ‘Allowing the Yuan to float freely would decrease the costs of imports for Chinese consumers, adversely affecting sales of locally produced goods.’ Wealthy Chinese consumers would simply continue to purchase foreign luxury goods, thanks to the stronger Renminbi.
Frankie P may well be right about this effect, but it seems that the analysts are not even in agreement about the ‘appreciation’ or ‘depreciation’ course of the renminbi, leave alone their respective effects on China’s domestic economy.
For instance at ZeroHedge Michael Every of RaboResearch says: ‘For a summary of what we now see coming, and its economic impact, please refer to this report published Friday; but one of them is a weaker Chinese currency’.
https://www.zerohedge.com/news/2019-05-13/if-you-want-remain-bullish-us-china-trade-all-focus-just-two-things
The RABO Bank report says: ‘What’s more, it seems that the market is suddenly taking the risk of retaliation by China more serious now, with the Chinese renminbi coming under heavy pressure. Since 3 May, the currency has lost nearly 2% in offshore markets already. We have often highlighted this depreciation risk, because China simply will not be able to find the sufficient amount of import goods from the US through which it can retaliate with higher tariffs. And this is happening against a backdrop of a Chinese economy that is structurally sliding into slower growth and – as a result – is trying to rev up its growth engine by stimulating CNY borrowing, which raises the risk that it will at some point lack sufficient dollars to match. We note that the playing out of the current trade war scenario has been baked into our bearish base-case for CNY for some time now. Hence, a further weakening of the CNY remains on the cards and, without a political change of heart from China, a test of the 7 level for USDCNY would seem imminent in our view.’
So what will it be: ‘apreciation’ or ‘depreciation’?
Perhaps they struck this devil’s bargain in order to be left alone to develop their society in peace. Japan developed quickly and when the US recognized it as a rival for control of China’s markets in the wake of 1914-19, hthey began making life difficult for Japan, which did not help its own case by assuming that a continental empire in east Asia was its only path to sustained prosperity. The faction in Japan that sought co operation with China as opposed to colonial domination fared poorly in the atmosphere of global depression.
How China could freeze the US military: https://www.zerohedge.com/news/2018-02-21/how-china-could-freeze-us-military
Report Warns US Military-Industrial Complex Hopelessly Dependent on China: https://sputniknews.com/military/201810051068643026-us-military-industrial-complex-made-in-china/
Ivan Danilov: The Pentagon Realised What It Has Done – the Chinese Put the US Army on Its Knees: http://www.stalkerzone.org/ivan-danilov-the-pentagon-realised-what-it-has-done-the-chinese-put-the-us-army-on-its-knees/
China could have a HUUUUGE negative impact on the US MIC WITHOUT firing a shot.
How China Could Freeze The US Military: https://www.zerohedge.com/news/2018-02-21/how-china-could-freeze-us-military
Report Warns US Military-Industrial Complex Hopelessly Dependent on China: https://sputniknews.com/military/201810051068643026-us-military-industrial-complex-made-in-china/
Ivan Danilov: The Pentagon Realised What It Has Done – the Chinese Put the US Army on Its Knees: http://www.stalkerzone.org/ivan-danilov-the-pentagon-realised-what-it-has-done-the-chinese-put-the-us-army-on-its-knees/
Author is completely wrong. If production cost of something is 10 dollars it’s absoluttely not important does China sell it to USA for 20 (with undervaluated yuan) or 24 (without undervaluated yuan). It’s still huge profit and it’s wrong to call it subsidy.
The most important points in the article to note are these:
“By conventional wisdom albeit these “injections” [of newly printed currency] hurt the currency they are good for the economy. This is nonsense. Logically creating more currency does not create an economic good, it merely redistributes the existing purchasing power in the market of that currency.”
Understand that well. Counterfeiting whether legal [done by governments or by banks] or otherwise [done by gangs of organised criminals, governments or banks] destroys the value of currency and wrecks the purchasing power of savings. It favours the politically connected while impoverishing those on fixed incomes, impoverishing those living off savings, penalising the productive, crippling especially the entrepreneur. All the while government, banksters and their protected, connected cronies and pets gain purchasing power at the direct cost of all others.
“The myth endures because it is convenient for governments and their supporters. A government which can create money out of thin air (usually by unbacked lending) is far more powerful in relation to the market and its citizens than one that cannot, and is not constrained by budgets or revenue — right up until it thrashes the currency and becomes totally impotent.”
This is the crack-up boom. The process of currency debasement leads to this. Along the way it enables a concentration and centralisation of great power. It also wrecks morals, destabilises societies, makes rational pricing of goods and services impossible, eliminates the possibility of logical planning and reduces people rate towards unnecessary desperate poverty where there once would have been plenty. No wonder Lenin was in favour of the process!
“In fact, decoupling availability of credit from the level of capital savings in the economy makes reliable economic planning on the market impossible leading to boom and bust cycles.”
Absolutely correct.
When the next recession/depression hits it is going to be a very serious one. It will be THE direct consequence of the decoupling disclosed above. It will viciously hurt people all over the world (including in China). Nevertheless, few will realise, nor ever accept, that the cause of their discomfort and destruction was caused by the institution of government.
“Far from a downside, it would be a good thing for China to abandon money bomb policies. Luckily Beijing is nowhere near as far down this road as the US is, and could do so much more easily.”
True enough. But there will be much suffering in China at a personal level since the government in China has reveled in destructive money bomb policies already and for some not inconsiderable time. They have not been as bad as the US in this, but eventually the piper must be paid. Just as with the US govt Ponzis, the Red Ponzis of China won’t get off scott free. Payment time approaches and, as is well known, there are no free lunches in this world. All debt is paid one way or another.