NationStates Jolt Archive

China has pegged it's currency to the US dollar. It's been at 8.3 juan to the dollar since 1994. This has kept the cost of Chinese imports to the US pretty cheap. Of course, the protectionist forces are looking for a way to undo this. One of the suggestions is that across-the-board tariffs should be applied to Chinese imports. That didn't work real well with the steel tariffs and I don't expect it to work here. A couple things this poor physicist just doesn't understand might be easily explained.

First, how can a currency stay fixed against all currencies? Okay, so the juan to dollar rate is fixed, but doesn't the juan to euro rate change independantly of the dollar? Couldn't a speculator take advantage of this variation?

Doesn't this make things made in the US more expensive in China? In fact, doesn't this make all foreign goods more expensive in China?

I'm sure this will raise more questions than answers, if anyone is interested.

Currencies are fixed by pegging them to other currencies. For example, the Argentinian peso used to be pegged to the U.S. dollar. One peso would always equal one dollar, but when the dollar changed against the Euro, the peso would change by the same amount. Some countries use a formula, using a basket of currencies of their biggest trading partners.

It is possible to make money by speculating on currencies. For example you can "bet" that a currency will devalue. It works often enough for people to keep trying, and is actually neccessary in a way for the system to work.

China's peg is a bit low and makes Chinese products cheaper to buy, and foreign products more expensive to buy. China could probably perchase more overseas items for the same amount of work, if it revalued.

So why doesn't China revalue? Well, first I'll point out that it is probably not that helpful to other countries if China were to revalue. Currently they can get Chinese products cheap, and who doesn't like cheap? Secondly, China's biggest internal problem are large, government run enterprises, that are too inefficent to survive a more realistic exchange rate. Chinese leaders would rather forgo the extra imports China could have in order to prevent unemployment. If unemployment got too high, the Chinese leaders could lose their jobs. I think the reason Bush wants China to revalue is so he can make it sound as if it's China's fault that poorer Americans are having ecomic difficulty, even though poorer Americans almost always buy cheap stuff. It comes down to politics.

The chinese currency is already heavily undervalued (purposefully, something which has been brought up in the WTO). A devaluation now would serve to further annoy certain powers.

I'd like to point out that the Chinese currency is called the yuan, and cents are referred to as fen, and 10 cent units are mao. All these are rather ancient terms, the general measure for currency in chinese is kuai. And money in general is just reffered to as qian.

haha nice this is like:sniper: battle :mp5: of the nerds. i love it!

The actual difference in the value of the Yuan and what its floated value is expected to be would not make enough difference to keep Chinese industry from flooding the USA with cheap goods.

The currency has traded in a narrow band to the US dollar since 1994.

US critics claim its value is 40% lower than it should be and that this seriously disadvantages US firms by making Chinese exports cheaper.
source (http://news.bbc.co.uk/2/hi/business/4557331.stm)


China could seriously upset the USA by floating the Yuan, which would then leave the USA with no reason to impose tariffs or quotas. However to do so, would cause havoc in the regional trade in South East Asia, and in the trade with Europe, so it seems unlikely to happen. I figure that the USA experts know this, and are just using the fixed rate as an excuse to enact protectionist policies.

Currencies are fixed by pegging them to other currencies. For example, the Argentinian peso used to be pegged to the U.S. dollar. One peso would always equal one dollar, but when the dollar changed against the Euro, the peso would change by the same amount. Some countries use a formula, using a basket of currencies of their biggest trading partners.

It is possible to make money by speculating on currencies. For example you can "bet" that a currency will devalue. It works often enough for people to keep trying, and is actually neccessary in a way for the system to work.

China's peg is a bit low and makes Chinese products cheaper to buy, and foreign products more expensive to buy. China could probably perchase more overseas items for the same amount of work, if it revalued.

So why doesn't China revalue? Well, first I'll point out that it is probably not that helpful to other countries if China were to revalue. Currently they can get Chinese products cheap, and who doesn't like cheap? Secondly, China's biggest internal problem are large, government run enterprises, that are too inefficent to survive a more realistic exchange rate. Chinese leaders would rather forgo the extra imports China could have in order to prevent unemployment. If unemployment got too high, the Chinese leaders could lose their jobs. I think the reason Bush wants China to revalue is so he can make it sound as if it's China's fault that poorer Americans are having ecomic difficulty, even though poorer Americans almost always buy cheap stuff. It comes down to politics.
So the Fed could say that a dollar is equal to a Euro and for better or worse that's what it is?

If China revalued the juan, the name for the currency used in the Wall Street Journal, it would make it less attractive to domestic U.S. industry to relocate to China. Or so it would seem. That's another political advantage to revaluation.

The biggest critics of the Snow report are the NY Democrats. Schumer has been all over Snow for not being aggressive in dealing with this issue. Other than blind partisan sniping, I fail to see how this position helps the Democrats. I agree with your comment about poor people buying cheap stuff. I don't see how higher priced Chinese goods would help the Dems. Unless it was to bring some manufacturing back from China.

I'd like to point out that the Chinese currency is called the yuan, and cents are referred to as fen, and 10 cent units are mao. All these are rather ancient terms, the general measure for currency in chinese is kuai. And money in general is just reffered to as qian.
we always refer to it as ren min bi (the peoples money) at my house.

but wouldnt devaluing the yuan make chinese goods even cheaper in the US? and make US goods more expensive in china? would this be good?

we always refer to it as ren min bi (the peoples money) at my house.

but wouldnt devaluing the yuan make chinese goods even cheaper in the US? and make US goods more expensive in china? would this be good?
I don't think we're talking about devaluing. That was a mistake I made in ignorance or in haste, I can't remember. Floating seems to be the proper term.

haha nice this is like (stupid smiley) battle (stupid smiley) of the nerds. i love it!

Haha, that was like a typical post by a n00b, sniper smilies and all. I don't love it.

I don't think we're talking about devaluing. That was a mistake I made in ignorance or in haste, I can't remember. Floating seems to be the proper term.
oh oh ok that makes better sense.

yeah it would be a good idea for the yuan to float but isnt that up to each country to decide about their own currency?

oh oh ok that makes better sense.

yeah it would be a good idea for the yuan to float but isnt that up to each country to decide about their own currency?
That's what I don't understand about this whole international currency thing. I've always thought of a currency more like a market commodity. There are things that make it increase and decrease in value, just like hogs or wheat. The idea that our Federal Reserve Bank could just arbitrarily say that a USD is equal to a Euro is hard to accept. The real value of the USD should be set in a market or by other international trade. Apparently that isn't the case. I've just been looking for a freshmen economics explanation about how this can be possible.

Part of the problem is that it is not just China and the US, it's actually closer to Asia and US. A lot of other Asian countries are either pegged to the dollar, or are currently being driven by US consumerism (Japan, where this is being followed daily, is one). Pretty much, Asia is running hot making stuff to sell to Americans. Americans are buying like crazy as it's cheap and Americans have never been very good saving (whereas many Asian countries save too much and their own goverments have problems getting them to buy). So China and the rest of Asia have a stake in seening the US dollar remain high and their own currencies low, which is why many Asian central banks have been buying dollars like crazy.

Sooner or later though, something's going to break. Either Amiercans will stop buying, or the political pressures America brings to bear will cause the central banks to stop buying dollars. The fear in Asian is another fiscal crisis, which could dessimate China, South Korea, and Japan, along with just about everyone else in Asia.

But, like the bubble economy in Japan in the 80's-90's and the tech stock boom in the US, they can't seem to stop.

At least that's what I understand from the papers here. Am I wrong?

That's what I don't understand about this whole international currency thing. I've always thought of a currency more like a market commodity. There are things that make it increase and decrease in value, just like hogs or wheat. The idea that our Federal Reserve Bank could just arbitrarily say that a USD is equal to a Euro is hard to accept. The real value of the USD should be set in a market or by other international trade. Apparently that isn't the case. I've just been looking for a freshmen economics explanation about how this can be possible.

Currency is issued by the governement. It has a monopoly on the product, and as such can set the price at whatever level it wishes to. In China's case (and many of the Latin American countries until recently) the only legal trade in the currency is through government run agencies. These set the price at 8.3 Yuan to the dollar. No market forces in play whatsoever. There will of course, be a black market, but as the dollar is a 'hard' currency wheras the Yuan is not the price of the dollar is likely to be higher (10-12 yuan), but this can not be used in international trade. (No export permits would be forthcoming without the exchange certificates etc.)

That's what I don't understand about this whole international currency thing. I've always thought of a currency more like a market commodity. There are things that make it increase and decrease in value, just like hogs or wheat. The idea that our Federal Reserve Bank could just arbitrarily say that a USD is equal to a Euro is hard to accept. The real value of the USD should be set in a market or by other international trade. Apparently that isn't the case. I've just been looking for a freshmen economics explanation about how this can be possible.
i think they are only commodities if they float and that this is up to each country to decide. it can be good but it can also be an utter disaster.

if a weak economy has an artificiallly low/high value against the dollar its going to end up crippled in international trade. if they decide to float it, it can go into hyper inflation. *shudder*

Currency is issued by the governement. It has a monopoly on the product, and as such can set the price at whatever level it wishes to. In China's case (and many of the Latin American countries until recently) the only legal trade in the currency is through government run agencies. These set the price at 8.3 Yuan to the dollar. No market forces in play whatsoever. There will of course, be a black market, but as the dollar is a 'hard' currency wheras the Yuan is not the price of the dollar is likely to be higher (10-12 yuan), but this can not be used in international trade. (No export permits would be forthcoming without the exchange certificates etc.)
Okay in US--China trade issues the fixed price would always work. I guess I'm just not thinking like I should, but I just see complications in China-non US trade. But what it seems must happen is that all transactions must be made in USD?

Here's what I mean. A machinist in Italy wants to buy a drill press that's made in China. The juan to Euro rate depends on the Euro to dollar rate, so we are just doing unit conversion Euro-->USD-->juan. Sure there will be a Euro to juan exchange rate, but it is exactly proportional to the Euro to USD exchange rate.

Is that the only way a "pegged" currency can fluctuate with respect to another currency? Wow, this seems so artificial, I can't imagine it being workable except through heavy government intervention.

Thanks y'all.

Please realise,that it isn't just the yuan, it is the yuan renminbi. Second of all, the yuan renminbi is worth very little all ready, the question should be why they don't make the yuan renminbi worth more? don't you all agree. It seems rather silly to ask them to devalue, it's like asking us to make one dollar worth one cent, which would make it so that we would have to carry wheelbarrows of money around, to go and buy a few grocries. You are asking for higher inflation rates in China, no way!!! :( you'll just end up hitting your head against the wall, if that happens. :headbang:

Is that the only way a "pegged" currency can fluctuate with respect to another currency? Wow, this seems so artificial, I can't imagine it being workable except through heavy government intervention.
The point being just that, heavy goverment intervention, and since goverments are motovated by politcal rather than economic reason, it can make for weird situations. Two good examples of this would be job outsourcing of US jobs to India and other places, where the Bush administration had to quickly pull back statements that such things are GOOD for the economy due to backlash, and the trade imbalance between Japan and America in the late 80's due to the auto and electronics trade (Where President Bush Sr. went to Japan and proceeded to throw up in the Japanese Prime Minister's lap).

In both cases the markets and consumers were stating what they wanted, but they were also bringing large pressure to bear because of non-econimic reasons and those reasons are what caused goverment reaction.

So the Fed could say that a dollar is equal to a Euro and for better or worse that's what it is?

They could do that, but would you believe them? The only reason people belived in Argentinas peg to the U.S. dollar was that they had one U.S. dollar for every peso they had. At least they did until things came unstuck. The U.S. could peg to the Euro if it really wanted to, but it would be more difficult than letting the currency float. Pegging is might be helpful for small countries with lots of foreign trade. That way currency movements hopefully won't jerk their economies around too much.

Nobody asks them to devalue the currency.

The problem is, that it is easy to exchange foreign currency into local currency at any bank. It is next to impossible to exchange local currency into foreign currency.

Even foreign companies wanting to pay their foreign staff have to apply at least one week in advance for that. Every month, for every foreign employee. And only at appointed banks - you need an approval for that as well.

If you are a foreigner and have an account in local currency, you can't just transfer some money to your family at home, if you feel like it. You need to have a valid reason.


One liter petrol is about US$ 0.35 at the local gas station.

While the Worldbank has set the poverty level at US$ 1 per day, in China the government set the level at about 1/8 of that. -> in this way they moved millions of people out of poverty. LOL