China's revalues its currency

The decision of the People's Bank of China to raise the value of the Yuan by up to 2% per day is certainly a small step but it is the first tangible evidence of the intention of the chinese leadership to eventually trust the market to establish the relative value of its currency. My understanding is that a special high level government committee has been holding daily meetings for some time considering whether, when, and how, to move away from the fixed exchange rate for the yuan without producing internal turmoil. 

The decision to re-state the rate on a daily basis with up to a 2% adjustment, and to express the rate in terms of more than a single currency is by no means equivalent to a floating exchange rate any more than the periodic adjustment in interest rates by the Fed is a floating interest rate. The rate will be set by the government officials each evening and will supposedly reflect market conditions.

I was hoping for bolder action that would allow market conditions to actually drive the change but this is at least a step in the right direction. 

However if we are expecting that this modest step or even far bolder steps regarding the exchange rates for the chinese yuan are going to dramatically impact our enormous trade imbalance with china we are expecting what is not going to happen. The exchange rate is only a small part of the problem. And not all aspects of the problem are within the control of the chinese government. 

In my estimation the two most significant drivers of our current account deficit are our voracious appetite for petroleum. At today's prices, imported oil accounts for 1/3 of our trade deficit. I am convinced we will see no significant improvement in this area until bold and future oriented action is taken to dramatically focus attention on alternatives. What impact do you think a $50 (or $100) per barrel tax on  imported oil would have on both consumption rates and the deficit? Go figure and you may decide it would be worth the short term pain of increased gasoline prices. A $50 per barrel import tax would produce in excess of $215 billion in taxes per year assuming no drop in demand due to the higher prices.

The other primary driver of the current account deficit in recent years has been the Wal-Mart syndrome.

If you saw the PBS special detailing the way in which Wal-Mart has essentially become a chinese based supplier, you know how successful they have been in doing it and saying they didn't. Their primary motives are not to provide consumers with lower prices. That is simply a strategy to make Wal-Mart the most profitable monopoly in the world. They drive their prices down in order to drive their competitors out of business so they can raise their prices and profits. We need new anti-monopoly legislation that more adequately addresses the conditions they have created. They are not acquiring their competitors to eliminate competition. They don't need to do this. By buying their products so cheaply they can often sell at prices below the price their competitor's pay at wholesale. The most vulnerable are not other large retailers like K-Mart and Target. The most vulnerable are the mom and pop, locally owned, stores that have been the life blood of small town America. We all know what impact this strategy has had on mainstreet businesses across small town America.

A third factor in the current account deficit is the lack of an aggressive and intelligent export marketing strategy on the part of American business. I like the Motorola philosophy. They sought to challenge overseas competitors in their competitors home markets to keep them occupied at home and thus they would be less able to focus on competing for Motorola's domestic market.

Unfortunately the current administration has little interest or concern about the problems of the average American household. There was a time when the philosophy was: If it's good for General Motors, it's good for America. Today the philosophy seems to be, if it's good for big business and corporate profits, it doesn't matter whether it's good for America.

        John

John E. Cleek, Ph.D., Moderator

http://abetterfutureforall.blogspot.com/

Louisburg, Kansas

"Where there is no vision; the people perish."  Proverbs 29:18

On Jul 22, 2005, at 3:20 AM, Trey McAtee wrote:

Here's the funny...

 

The People's Bank of China raised the value of the yuan by 2 percent on yesterday, to 8.11 to the dollar. But more important, the bank said that each evening, it would set a new trading range for the yuan to move within on the next trading day. To add to the uncertainty, each day's new range may not necessarily be expressed in terms of dollars, the bank warned. It did not provide examples, but the euro would be the most likely alternative.

 

From today's NYT

 

They honestly can't swing too wildly anytime soon, but the writing is on the wall... we're getting set up. No one's going into panic yet because the theory is they'll hold the volatility and the increases in value to around what they did in the mid 90s.

 

Should be interesting...