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»Issue 8, Volume 07 www.scarbrough-intl.com » August 2007 |
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COVER STORY The Peoples Currency of The Peoples Republic of China The renminbi literally means “the people’s currency”. The renminbi is the official currency in the mainland of the People’s Republic of China whose principal unit is the Yuan. In the last several years the Yuan has received a lot of international attention. In the U.S. taxpayers have paid millions of dollars to finance a seemingly endless series of hearings on the mainland exchange rate Before getting into more details, one thing to understand is China operates under a non-market economy. A non market economy means most major economic decisions are imposed by government and by central planning rather then by free use of markets. In contrast the U.S. operates under a market economy which in a nut shell means the consumers and producers drive the economy. It also means the laws of supply and demand are let loose. The Yuan has been in the spot light as it has been alleged to be pegged to the U.S. dollar. In 1997 China set their currency at roughly 8 Yuan to every USD. Premier Zhu Rongji was in power when this peg was set and upon his retirement in 03 from government service declared setting this peg to be China’s smartest financial decision which has led to global stability. This peg was set not to keep the Yuan from rising but rather to keep China’s currency from collapsing. The result of this peg was a hyperactive Chinese export market and a huge influx of foreign reserves. To date China has roughly $1.2 trillion. A large portion of these reserves are invested in U.S. dollar denominated debt, such as U.S. Treasury’s which are considered the world’s safest investment. That has kept demand for U.S. Treasury notes high and interest rates in the U.S. low. Some in Washington fear that China might one day dump its holding of dollar based assets setting off a tidal wave of sales that might swamp the U.S. economy. If there is this massive sell off, that ARM you got such a good deal on will now look like a hissing snake. Some say that China’s massive foreign exchange reserves are a direct result of China’s efforts to manage the exchange rate of its currency. Some also say that the undervalued Yuan has widened an all ready large trade deficit between the U.S. and China. Some also say that the undervalued Yuan has cost U.S. manufacturing jobs. China has been under heavy international pressure to allow their currency to float. Since 05 China has allowed the Yuan to float however at a very low level. This small fluctuation has not gone over well with many politicians in America. Senators Charles Schumer and Lindsey Graham had proposed a bill to slap all Chinese imports with a 27.5% duty. This bill never made it to the senate. The abandonment of this bill is not a sign of moderating protectionist sentiment in the U.S. but rather recognition of what is realistically achievable. The Bush administration this year has also filed three World Trade Organization cases against China on intellectual property protections and state subsidies and changed a long standing Commerce Department policy, opening up China to countervailing duty trade cases. These countervailing duties are tools to try and enforce fair competition. Over the last few weeks you should have heard about the many recalled and tainted Chinese consumer products in the news. It is important to note that safety standards have a history of being used as trade barriers; endangering consumers have taken the place of charges of unfair competition and dumping. China has deflected pressure to speed up the rise in their currency stating it could cause an economic crisis. Chinese economists say the Yuan will more and more reflect market forces however in short term will remain at a very structured pace. Inevitably Chinese officials realize that they must do something to cool down their overheating economy. The fact is however nobody is certain that a revaluation of the Yuan will have dramatic negative impact on China's overall export success. An important figure to note with regards to the U.S. / China trade deficit is as follows. From 2004-2007 the monthly mainland trade surplus jumped by nearly $20 billion. The net exports to the U.S. from this figure are $6 billion. This means that the majority of China's net trade expansion has been to other countries then the U.S. Adding to this fact is loads of processing and assembly operations have been shifted from other Asian countries to the mainland of China which has artificially added to their trade surplus. An argument against China stealing U.S. manufacturing jobs is the fact the U.S. has been losing manufacturing jobs at a 4% rate since the middle of the 20th century, which is well before China's boom. The arguments for slow and measured revaluation opposed to accelerated revaluation are certainly debatable. What is not debatable is some see China’s enormous economic expansion as an opportunity and others see it as threatening. For more information please contact us at info@scarbrough-intl.com. -- Patrick Colligan, CHB Operations Manager |
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