Saturday, October 28, 2006
China and its currency
This “problem” (I use quotes because its only a problem for the US, and quite a gain for china) seems to have been put on a backburner.
China has kept its currency, the Renminbi or also known as the yuan pegged to the US dollar. This means that the currency rises and falls in value with the US dollar.
Because the currency is kept undervalued with the dollar, China has become the manufacturing outsourcing capital of the world. China is now one of the fastest growing nations, soon I think it will take status as a superpower. Its economy is growing at extreme rates and the money just keeps flowing into China. Usually when an economy is doing so well the currency will gain value, but since it is pegged to the USD without a free float it will stay undervalued.
Why the US is up in arms:
-A cheap currency in China means that jobs will be outsourced to China.
-The trade deficit with China will always be huge for the US because the currency is so cheap.
Good for China:
-Steady flow of money into the countries economy because it will always be cheaper than producing in the US/
-Since it is pegged to the dollar, the Chinese don’t ever have to worry about becoming more expensive than domestic manufacturing because the currency is pegged.
China has moved forward and began to peg the yuan to a “basket” of currencies, although that basket is widely unknown.
I think when China is ready to take on its status as a worldwide super power it will unpeg its currency. I believe that the yuan would gain incredible amount of value just in the first month of trading. There is so much potential in China but it is being restricted because of the currency peg.