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China Currency Manipulation Global Trade Imbalances, A World Without Yuan 6.83

Currencies / China Currency Yuan Jan 27, 2010 - 12:51 AM GMT

By: Submissions

Currencies

Best Financial Markets Analysis ArticleKeith Hilden writes: As countless newspapers and media outlets across China continue to reiterate that the fiscal policy of China to refuse the appreciation of the renminbi is made clear on an almost daily basis, it has been established that this policy suits China and its interests. It certainly does. But when a country makes a decision based solely on its own interests, and it negatively affects the interests of every other country in the world, what is the boundary of acceptable conduct for that country to follow in the interest of the rest of the world?


We in these times hear constantly about how we should globalize our trade and how we should facilitate smooth international trade, but how are we to facilitate this smooth trade when one country's currency policy chokes off growth to all countries who refuse to peg their own currency? Not to mention that some countries cannot afford or are not willing to risk rising inflation and the financial sacrifices necessary of containing a currency peg, there under all the news coverages is a World Trade Organization mandate restricting any country in its membership from pegging its own currency. So under this arrangement, we must either assume the World Trade Organization cannot pull its own weight to enforce the regulations set by it, or the world has created an exception to the rule, allowing one country to place a stranglehold on all other countries' manufacturing capabilities.

6.83 is the one number that has defined our past decade. No other number in the world has managed to affect the lives indirectly of every single person on the planet in the last decade. 6.83, and the miniscule fluctuations from the number, has managed to transfer a historic amount of wealth between sovereign nations. No other number has been able to define the last decade age as 6.83 has so done.

But is it against WTO regulations to have 6.83 even exist, let alone to have the number define our past decade? Merely looking at the law books, it would seem that it is against regulations. But, is a law really a law when there is no one to enforce it? Are laws simply our cultural norms, no more, so that we respond to 6.83 with a twisted up nose, and nothing else? Our world has more and more evolved into a world of global relationships, true, but have these relationships taken precedence over the rule of law? I don't have the answer for that, as the definition is being shaped and molded, continuously evolving by our global society as we speak. Our future convictions and our legislative collectivism will answer this in the future.

                    ----------A World Without 6.83--------

Can we imagine a world without 6.83? Can we imagine a world where China's manufacturing prowess and capability is determined by free market forces instead of protectionism? Can we see the outcome, of how individual countries would react, contract, and grow? Surely a world dominated by 6.83 has an idea of a world without it.

A world without 6.83 would free up China's massive reserves to be used for its own interest. 2 Trillion plus dollars would be instantly available to use at China's discretion, and the U.S. would receive a 2 Trillion dollar hit in lost U.S. treasuries. The U.S. would have to either find another country willing to buy up U.S. treasuries, or the U.S. would have to finance its own deficit issue. This is life. America made some decisions in the past, and in the future, the U.S. will have to face up to them. Tough decisions will have to be made concerning the straightening out of America's financial house. It is a mathematical impossibility that the U.S. Marines can continue to safeguard the value of the U.S. dollar indefinitely; as deficits rise and threaten the U.S. dollar, a larger military force in proportion to the deficit will be required in order to safeguard the value of the U.S. dollar.

This can only continue until the equation currently in use eventually collapses into shards of algebraic chaos; long term, the equation just does not compute! This cannot, and mathematically will not, be a possibility for the U.S. leadership to consider. Some of you may be thinking that war may be a way to deal with such a problem, a tactic that is not unfamiliar to American leadership. War certainly is a tool of profit for any regime that uses it properly. But can we find a solution that avoids the massive loss of human life?

In a world without 6.83, America's economy would initially suffer. After all, 2 trillion dollars of previously financed U.S. debt by the Chinese suddenly would return right back to the U.S.. America would be in a tailspin in a wild whirling dervish trying to find other clients for U.S. debt. They might find it, and short-term might be able to eke out a little more time of Comfortably Numb, but long-term the deficit would balloon to something monstrously unmanageable, monstrously moribund, one of which one would not dare to poke at with a stick. America would be forced to do what other countries do; take the bitter pill of budget reform. America would have to balance its budget, something that Americans used to be able to do second-nature. America would have to take various punitive measures in order to get its own financial house in order. But, in a world without 6.83 and a floating renminbi, uncompetitive manufacturing facilities in China would shut down and move, amongst other countries, to the United States. That would provide a boon of manufacturing jobs that would aid to comfort and cover the shock and consequence of the U.S.'s independence from China.

The influx of good-paying, productive manufacturing jobs from China to the U.S. would bring back long-term stability to the sovereignty of the United States of America, but what of Europe? For starters, the current complaints of European businessmen directed at the renminbi for indirectly causing difficulty in their own industries, would stop. With a floating renminbi, the Euro would not appear terribly expensive as compared to the renminbi. Labor for labor between countries could compete for quality and price, not just price. It would put the Euro back into an advantageous position as the uniting force of a single Europe. Greece and Portugal could locally manufacture goods for local customers, and remain both locally and globally competitive. Eastern Europe would recover from its collapse from a stimulus bill aimed at local manufacturing operations to create jobs, and their mortgages would be again able to be paid, in foreign Swiss francs. The UK would not see immediate recovery from such a change, for their situation is similar to the U.S. in terms of massive deficit and national debt issues, but in the longer-term the UK would recover nicely.

In a world without 6.83, hundreds of millions of hungry but ambitious Africans could start making goods in their own countries, as without the 6.83 renminbi peg, the already cheap African currencies could instantly be perceived as bargain countries, and bargain currencies. An extremely significant amount of capital the world over could come into these African lands, and the African peoples could provide cheap and skilled labor for manufacturing. Because Africa is not one country, the boom from this investment would pit one country against another in a healthy economic fashion, providing the best results a free market economy model can deliver. Africa, in a world without 6.83, arguably might be the region that benefits the most from this policy change.

In virtually all other countries in the world, all countries would see a rise in manufacturing capacity, and a reduced unemployment rate from the following labor influx into each country.

But what of China? China would appear to be the loser of this arrangement, a victim again in a Western-dominated imperialist world. Or would it? A world without 6.83 seems to favor China as well. 2 Trillion-plus dollars China currently holds, but has difficulty converting into liquid capital, would suddenly be free, to use as China wishes. China would instantly become an investment juggernaut, paling the likes of Abu Dhabi or Goldman Sachs, with 2 trillion dollars of liquidity to slosh into any funds it saw fit. With the renminbi rising, unproductive factories would be closed down, and the productive and profitable manufacturing outlets would stay open. China's national savings rate in dollars would explode, and it would allow the government as well as the people to wield a powerful currency, able to purchase many things.

Consumer prices and living costs would drop, due to no unnecessary inflationary irritant, a requirement as is needed during a currency peg. The significantly stronger value of the renminbi would lower the prices of foreign goods and foreign materials required to make goods. Lastly, the current stockpiling of precious and rare materials and metals within China could be unloaded, realizing very lucrative profits and driving up the Chinese sovereign wealth even higher. It would also free up the Chinese people's liquidity, as there would be less need and demand to stockpile materials and metals once the international trade relationships were again rebalanced.

We see in this world without 6.83 an America with serious growing pains, albeit unavoidable, but a bright future once the growing pains subside, a convertible and labor-strong Europe, a flourishing Africa, and a China that has finally reached the international stage, with the dignity and respect of all nations afforded to it.

Ask yourself; do you want a world with or without 6.83? The rebalancing of trade relationships will benefit all nations on this earth, and with this balance, we can all find ourselves living in a fairer, safer world.

By Keith Hilden

keith.hilden@gmail.com

© 2010 Copyright Keith Hilden - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Zhu, Bajie
29 Jan 10, 03:25
6.83 - The Facts

Dear Keith:

You should get your 6.83 facts clear. To get to the $2.40 Trillion in reserves, Beijing had to issue Yuan denominated bonds to swap for the dollars. So the liquidity (in the form of Yuan currency) is already there, in the Chinese economy fueling growth. The main difference between the Chinese stimulus (which created over 10 million jobs in 2009) and the American stimulus (which did squat) is that Beijing was able to convince the banks to loan, mostly to spade ready infrastructure projects, and that immediately led to higher employment. In contrast, in America the entire $14 Trillion (including the guarantees) were given to the moneychangers who caused the worldwide meltdown in the first place), who promptly granted themselves yet another year of record breaking bonuses (that would be 2 years in a row, with totals close to US$200 Billion in 2009). Washington is supposed to PUNISH the banksters for screwing up the lives of Americans, not REWARD the fraud. Less than 1% of the $14 Trillion was given to Main Street - if there were harm, it was largely self inflicted.

The hard work of the Chinese workers brought Americans 30 years of good life - almost no inflation, wonderful appreciation of the stock markets and the real estate markets. It was the Americans’ chance to take advantage of that and do wonderful things, such as upgrade the education system, have health reform, etc., all while the nation can comfortably afford it. Instead Americans allowed the greedy pols to run the nation into the ground. This latest round of China bashing is yet another feeble attempt to divert attention from how badly the hapless Washington screwed up.

"The influx of good-paying, productive manufacturing jobs from China to the U.S. would bring back long-term stability to the sovereignty of the United States of America . . . ." But WHERE in China are these supposedly good paying jobs? China manufacturing jobs pay $1.50 an hour. Who in America wants that? Also, in this globalized economy, the low skill jobs will just flow to even lower wage countries. Many low end factories are already starting to move from China to Vietnam and African nations. There's just a snowball's chance in Hades for those jobs to come back to the U.S. It has everything to do with wage rate discrepancies, and has little to do with the exchange rate. Even if the Yuan appreciates by 50%, that would only make the Chinese manufacturing jobs pay $2.25/hr., hardly attractive or enough to support a family in America.

If high paying jobs are really desirable, you'd see America doing away with the silly export embargoes, and that alone would mean US$100 Billion in extra export sales.


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