What are the implications of China devaluing its currency?
Why is America removing so dissapoint about a probability of China devaluing the currency? Is it unequivocally which bad? Surely it will assistance countries which import products from China?
By making their money cheaper it makes their goods cheaper. So, yes, people buy more from them cheaper.
But that moves money to China, it drains money from the United States that because they are making OUR goods MORE expensive they don’t buy from us.
Exchange rates if are allowed to operate in a free market, float normally, their money would increase value to balance the unfair, unequal trade balance, making our goods cheaper and they would buy more from us.
But China is controlling their money value by manipulation to drain money from other countries.
Rule of thumb is whenever government interferes, there’s inefficiency. By holding their currency cheap, China is bringing unfairness to trade between them and those countries who play fair game (by not interfering to their currency rates). Thus China is getting current account surplus and US is getting current account deficit. (although there are other source of this deficit besides currency rates). You can also observe how China’s forex reserves are growing. Some economists view this as not necessarily negative. Since Capital inflow to the US should balance out. Since there’s investment surplus in the US. However we have to pay interest and dividends for these investments.
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Comments: 2 comments
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Thor
August 10th, 2009 at 2:39 pm
By making their money cheaper it makes their goods cheaper. So, yes, people buy more from them cheaper.
But that moves money to China, it drains money from the United States that because they are making OUR goods MORE expensive they don’t buy from us.
Exchange rates if are allowed to operate in a free market, float normally, their money would increase value to balance the unfair, unequal trade balance, making our goods cheaper and they would buy more from us.
But China is controlling their money value by manipulation to drain money from other countries.
Mike G
August 10th, 2009 at 2:39 pm
Rule of thumb is whenever government interferes, there’s inefficiency. By holding their currency cheap, China is bringing unfairness to trade between them and those countries who play fair game (by not interfering to their currency rates). Thus China is getting current account surplus and US is getting current account deficit. (although there are other source of this deficit besides currency rates). You can also observe how China’s forex reserves are growing. Some economists view this as not necessarily negative. Since Capital inflow to the US should balance out. Since there’s investment surplus in the US. However we have to pay interest and dividends for these investments.
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