Full Version: China's currency no longer tied to USD
China Severs Its Currency's Link to Dollar
For debate:
What impact will this have now that the Chinese yuan is no longer tied to the US dollar?
How will this affect the US economy?
How will it affect individual consumers?
QUOTE
China dropped its politically volatile policy of linking its currency to the U.S. dollar on Thursday, adopting a more flexible system based on a basket of foreign currencies that could push up the price of Chinese exports to the United States and Europe.
The government also strengthened the state-set exchange rate to 8.11 yuan to the dollar - from 8.277 yuan, where it had been fixed for more than a decade - in a surprise announcement on state television's evening news.
The government also strengthened the state-set exchange rate to 8.11 yuan to the dollar - from 8.277 yuan, where it had been fixed for more than a decade - in a surprise announcement on state television's evening news.
For debate:
What impact will this have now that the Chinese yuan is no longer tied to the US dollar?
How will this affect the US economy?
How will it affect individual consumers?
QUOTE(otseng @ Jul 22 2005, 10:28 AM)
What impact will this have now that the Chinese yuan is no longer tied to the US dollar?
How will this affect the US economy?
How will it affect individual consumers?
How will this affect the US economy?
How will it affect individual consumers?
The honest answer to all those questions is that it is too early to say. No one knows exactly how the new system will operate. It is not likely China is going to volunteer information anytime soon. This is definitely a wait see type of situation.
QUOTE
The Chinese called it a “managed floating exchange-rate regime”, which may well imply more management than floating. Neither the currencies in the basket used to set the level of the yuan, nor their weights, have been disclosed. The fact that the Chinese have acted at all is important. But the eventual economic and political effects of the revaluation will depend on how far and how fast the yuan moves from now on. In Friday's trading it barely budged—and in fact closed a fraction below 8.11 to the dollar, suggesting the authorities are keen to damp down market expectations of further rises.
Until there are some more specifics, it is not clear if this will change anything.
I tend to agree that the move is not very significant in and of itself. We have to wait to see how China manages the new currentcy system. In the long run, however, correcting the unreasonable balance in current accounts with China has to be done and it will produce profound effects on the American economy. Here is Paul Krugman's take on it. Krugman Commentary?. Krugman is a Princeton economist and NYT editorial writer.
QUOTE(TedN5 @ Jul 22 2005, 02:32 PM)
I tend to agree that the move is not very significant in and of itself. We have to wait to see how China manages the new currentcy system. In the long run, however, correcting the unreasonable balance in current accounts with China has to be done and it will produce profound effects on the American economy. Here is Paul Krugman's take on it. Krugman Commentary?. Krugman is a Princeton economist and NYT editorial writer.
This is a bit off topic but I am not sure about this part of Paul Krugman’s analysis:
QUOTE
In the long run, the economic effects of an end to China's dollar buying would even out. America would have more industrial workers and fewer real estate agents, more jobs in Michigan and fewer in Florida, leaving the overall level of employment pretty much unaffected. But as John Maynard Keynes pointed out, in the long run we are all dead.
Whether or not the current housing boom is a bubble (I’ll leave that for a different debate) Florida’s population boom is due to retiring citizens and northerners moving South. This is creating a demand for homes; this is similarly true in other fast growing places in the South like Charlotte, Greensboro and Raleigh. These areas are booming not because of interest rates (the rates are helping I do not argue that), but because people “want” to live there. Even when the interest rates are higher, people will continue to move to Florida and North Carolina.
What impact will this have now that the Chinese yuan is no longer tied to the US dollar?
This is a starting point for China to avoid tariffs or Unacol oil interference from the US. The Chinese people will be able to afford more US made products(although 2% is no where near the estimated 40% differential that many economists believe is in the yuan). US citizens will find Chinese goods more expensive.
How will this affect the US economy? Inflation pressures increase on goods sold in the US, outsourcing pressures decrease. Overall it's a good thing that the trade deficit with China will decrease.
How will it affect individual consumers? Depends on if said consumer has a job that sells goods or services to China. The cost of Chinese goods will go up so we won't be able to by as much of their stuff.
This is a starting point for China to avoid tariffs or Unacol oil interference from the US. The Chinese people will be able to afford more US made products(although 2% is no where near the estimated 40% differential that many economists believe is in the yuan). US citizens will find Chinese goods more expensive.
How will this affect the US economy? Inflation pressures increase on goods sold in the US, outsourcing pressures decrease. Overall it's a good thing that the trade deficit with China will decrease.
How will it affect individual consumers? Depends on if said consumer has a job that sells goods or services to China. The cost of Chinese goods will go up so we won't be able to by as much of their stuff.
What impact will this have now that the Chinese yuan is no longer tied to the US dollar?
From my understanding, the yuan and the dollar was pegged by the fact that dollars held by the Chinese was immediately used to buy USG bonds. Now that the tie is severed and the demand for treasuries will decrease, bond interest rates will probably be going up.
How will this affect the US economy?
Rising long term interest rates will mean higher mortgage interest rates and higher loan rates for businesses. Higher interest rates would be good for savers, but bad for debters.
Also, prices of Chinese goods in America will start to rise. But, American goods in China will start to fall. So, American companies that sell things to China should see an increase in demand.
How will it affect individual consumers?
We'll probably see less and less dollar stores.
From my understanding, the yuan and the dollar was pegged by the fact that dollars held by the Chinese was immediately used to buy USG bonds. Now that the tie is severed and the demand for treasuries will decrease, bond interest rates will probably be going up.
How will this affect the US economy?
Rising long term interest rates will mean higher mortgage interest rates and higher loan rates for businesses. Higher interest rates would be good for savers, but bad for debters.
Also, prices of Chinese goods in America will start to rise. But, American goods in China will start to fall. So, American companies that sell things to China should see an increase in demand.
How will it affect individual consumers?
We'll probably see less and less dollar stores.
What impact will this have now that the Chinese yuan is no longer tied to the US dollar?
How will this affect the US economy?
How will it affect individual consumers?
I don't think that the demand for cheap goods form the Far East will be significantly affected, particularly in areas of the economy that are not linked to manufacturing e.g. the huge retailing sector. Retailers don't care whether the stuff they sell is made in China or Cheyenne - as long as they can pass on any price increases to the consumer rather than take a hit on their own profits. The entire economy in the West now depends rather more on domestic consumer spending than on exports to China, so I don't think the minor increase in prices of Chinese goods, and the minor benefit to exporters of goods to China, will have nearly as much impact as the increase in domestic retail prices, which will cause in flation, which will cause a rise in interest rates which will in turn have a depressive effect on the US economy. .
On the plus side, European exporters will become somewhat more competitive - despite the huge trade imbalance between the USA and China, China is still not the largest exporter in the world - that's still Germany, despite their macroeconomic problems.
Too much in the US economy depends on consumer spending, and US manufacturers are still too expensive and inflexible to take up much of any slack created by this move form China, for anyone to be able to afford to allow this to depress that consumer spending. Of course, this just stores up bigger problems down the road, when people can no longer afford to service their debts.
It seems to me that China is playing chess here, not the checkers that the US government seems to be playing back at them. But then, they did invent the game (chess AND strategy) in the first place, so I suppose it's understandable if they're a little better at it.
How will this affect the US economy?
How will it affect individual consumers?
I don't think that the demand for cheap goods form the Far East will be significantly affected, particularly in areas of the economy that are not linked to manufacturing e.g. the huge retailing sector. Retailers don't care whether the stuff they sell is made in China or Cheyenne - as long as they can pass on any price increases to the consumer rather than take a hit on their own profits. The entire economy in the West now depends rather more on domestic consumer spending than on exports to China, so I don't think the minor increase in prices of Chinese goods, and the minor benefit to exporters of goods to China, will have nearly as much impact as the increase in domestic retail prices, which will cause in flation, which will cause a rise in interest rates which will in turn have a depressive effect on the US economy. .
On the plus side, European exporters will become somewhat more competitive - despite the huge trade imbalance between the USA and China, China is still not the largest exporter in the world - that's still Germany, despite their macroeconomic problems.
Too much in the US economy depends on consumer spending, and US manufacturers are still too expensive and inflexible to take up much of any slack created by this move form China, for anyone to be able to afford to allow this to depress that consumer spending. Of course, this just stores up bigger problems down the road, when people can no longer afford to service their debts.
It seems to me that China is playing chess here, not the checkers that the US government seems to be playing back at them. But then, they did invent the game (chess AND strategy) in the first place, so I suppose it's understandable if they're a little better at it.
I don't have the first clue about what this will mean for either China, the USA or any where else, but I'd like, if I may be so bold as to interject a simple question:
Will this move make China more independent of the USA?
Will this move make China more independent of the USA?
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