What he is not speaking is that if the RMB was allowed to freely float it would appreciate much more than the 2-3% range it is currently moving in.
If the Chinese allow free float of RMB their exports to the US will reduce drastically putting their economy in a tailspin.
OPEC is the big daddy of oil business and they will continue to deal in US Dollars.
RMB is never going to be the global currency like Dollar, because of one single reason--- There is no transparency in the way Chinese economy operates. No country will place their Forex reserves in a currency which is artificially controlled.
I am not sure if I can explain it in few hundreds words since it is really big subject, but I will try my best!
One of the most important lessons Chinese learned from 1997 crisis is: currency appreciation is unavoidable after years of trade surplus, but it should be managed in your own way. In other words, your industry departments must be given time to adjust their strategy and production in order to absorb it, for example:
1. Moving some parts production line to lower cost country such as Vietnam, Cambodia, Bangladesh and India, etc.
2. Using machine to replace workers as the cost of machine is going down (especially when these machines are imported or have foreign key parts)
3. Developing new products/technology or moving into new manufacture sector. In 1990s, the majority of Chinese exportation was textile, toys, while today machine and electronic equipment are on the top of list.
4. re-training workers to cope with higher skill requirement.
At the meantime, Chinese has offered huge RMB loans to Africans and South Amercians to build up their infrastructure and manufacturing base. Certainly these loans will be paid back with their raw materials--oil, iron core, copper and even diamond.
As the result, since 2005, RMB has appreciated nearly 40% against USB, but China exportation wasn't shrinking, but growing further.
Thank you, both of you, for giving your thoughts on this subject.
Anyway, here is my take home message:
A weaker currency encourages exports, but discourages imports. Now, coming to what
@sob has stated, it is true that if the RMB is allowed to float free, Chinese exports to the US will dwindle. One things no note here is, that with the decline in the value of the US Dollar, even if there was no deflation of the RMB, Chinese exports will continue to get less competitive. This is the very reason why India continues to inflate the INR.
Regarding transparency, yes, there is lack of transparency with PRC. With the US, it is not much different. There is lack of trust with the US Dollar, ever since the US reneged on the Bretton Woods agreement. Economic crisis in the US have a ripple effect all over the world only because international trade is bound to the US Dollar, for most part. This allows the US to exports it inflation.
On the comment by
@no smoking, about currency appreciation with a high trade surplus, I agree, and I think his remedies are correct.
How the US exports inflation, can be better understood this way, but before understanding the chart, one should understand the terms:
- TC - Trading Currency money supply, a key factor in boosting GDP.
- TCC - Trading Currency Collateral, such as Gold used to back up that currency.
- QE - Quantitative Easing (essentially, printing money out of thin air).
- Wealth per TC - The amount of the collateral, in this case, gold, one unit of TC can purchase.
- TC Country - Country that controls the TC.
- ~TC Countries - Other countries, that own TC as forex reserves.
- DfBW - Departure from an agreement, such as Bretton-Woods agreement, or any agreement that ties the value of one TC to the collateral.
- The other terms are self explanatory.
YEAR | EVENT | QE | TC | TCC | Wealth per TC | ~TC Countries | TC Country | ~TC Country Wealth | TC Country Wealth | Wealth Transfer |
y+0 | | 0 | 10000 | 100 | 0.01 | 6000 | 4000 | 60 | 40 | 0 |
y+1 | | 0 | 10000 | 100 | 0.01 | 6000 | 4000 | 60 | 40 | 0 |
y+2 | | 0 | 10000 | 100 | 0.01 | 6000 | 4000 | 60 | 40 | 0 |
y+3 | | 0 | 10000 | 100 | 0.01 | 6000 | 4000 | 60 | 40 | 0 |
y+4 | | 0 | 10000 | 100 | 0.01 | 6000 | 4000 | 60 | 40 | 0 |
y+5 | | 0 | 10000 | 100 | 0.01 | 6000 | 4000 | 60 | 40 | 0 |
y+6 | DfBW | 10 | 10010 | 100 | 0.00999000999000999 | 6000 | 4010 | 59.9400599400599 | 40.0599400599401 | 0.059940059940061 |
y+7 | DfBW | 10 | 10020 | 100 | 0.00998003992015968 | 6000 | 4020 | 59.8802395209581 | 40.1197604790419 | 0.0598204191018539 |
y+8 | DfBW | 10 | 10030 | 100 | 0.00997008973080758 | 6000 | 4030 | 59.8205383848455 | 40.1794616151545 | 0.0597011361126221 |
y+9 | DfBW | 10 | 10040 | 100 | 0.0099601593625498 | 6000 | 4040 | 59.7609561752988 | 40.2390438247012 | 0.0595822095466545 |
y+10 | DfBW | 10 | 10050 | 100 | 0.00995024875621891 | 6000 | 4050 | 59.7014925373134 | 40.2985074626866 | 0.0594636379853739 |
Of course, many other variables that are in play, have been kept at a constant, to understand how inflation is exported by the US.
Look at how the value of the currency and the wealth transfer is diminishing exponentially. To keep the wealth transfer fixed, or to have a positive rate of change of wealth transfer, the amount of money printed out of thin air must increase exponentially every time there is QE.
@Sakal Gharelu Ustad, please correct me if I am wrong anywhere.