Chinese Yuan Peg

[TGoldman]

China's currency, the Yuan being pegged to the American dollar has been a topic of debate lately. I'm doing my best to understand the currency markets, but I fear the topic may be over my head so please correct me if I'm wrong anywhere. The basic idea is that the Chinese government purchases enough US T-Bills to control the supply and demand such that the currency markets maintain the peg of approximately 8.23 yuans to 1 dollar conversion. Alan Greenspan and other economists have been critical of this policy, and have been calling for the People's Republic of China to end this practice and let their currency float.

Okay.

Well, why doesn't the Fed stop talking and actually do something about it by buying up Chinese Yuan in order to force them into submission? If the Yuan's peg to the American dollar is causing the Chinese Yuan to remain artificially undervalued, why doesn't the government take advantage of the "cheap" yuans. This would be getting a great deal on the Chinese currency while putting the pressure on the Chinese to continue the peg at their own disasater. Is this logical, or would it be equivalent to an economic act of war?

From an individual perspective, does buying a small amount of Chinese Yuan make sense in the hopes that the currency may float eventually? This seems to have little risk if the peg is maintained, but high potential upside. Assuming of course that the currency is indeed being artificially undervalued by China's monetary policy as many believe.

[imported_bingobazza]

Im not sure...maybe its because it would mean printing even more dollars to buy yuan...I think Greenspan is realising he gone too far already with the printing presses....or maybe hes afraid of china? He should be...they have the power to sink the dollar like a stone.

[laserboy]

[ QUOTE ]
China's currency, the Yuan being pegged to the American dollar has been a topic of debate lately. I'm doing my best to understand the currency markets, but I fear the topic may be over my head so please correct me if I'm wrong anywhere. The basic idea is that the Chinese government purchases enough US T-Bills to control the supply and demand such that the currency markets maintain the peg of approximately 8.23 yuans to 1 dollar conversion.

[/ QUOTE ]

The yuan is LITERALLY pegged to the dollar at the rate of 8.28 to 1. It is not subject to fluctuation on the foreign exchange markets and cannot be manipulated by central bankers.

Central banks from other Asian countries with floating currencies, such as Japan and South Korea, do participate in currency manipulation as you describe. They buy massive amounts of dollars under the rationale that it will devalue their own currency and make their exports more competitive. This in turn fuels our massive deficit spending.

The US government does not need to take any action to counter this manipulation. The US consumer does it for them whenever they buy a product that is made outside the US. That money is eventually repatriated into some other foreign currency, ultimately devaluing the dollar.

Regardless currency manipulation is just a short term solution to a long term problem. The only permanent solution to a trade deficit is to produce a product that is competitive in the global marketplace.

[ QUOTE ]

From an individual perspective, does buying a small amount of Chinese Yuan make sense in the hopes that the currency may float eventually? This seems to have little risk if the peg is maintained, but high potential upside. Assuming of course that the currency is indeed being artificially undervalued by China's monetary policy as many believe.

[/ QUOTE ]

Your logic is correct... The problem is that everyone in the world is already aware of this and has loaded up on Chinese yuan denominated assets. There is already billions of dollars of hot money fueling massive asset bubbles in China. What will happen after the yuan is revalued and when all the money comes flowing out? If you figure it out, please let me know!

[KaneKungFu123]

Before Political Correctness you'd just import alot of opium into China and get the slanty eyes hooked.

[ QUOTE ]
[ QUOTE ]
China's currency, the Yuan being pegged to the American dollar has been a topic of debate lately. I'm doing my best to understand the currency markets, but I fear the topic may be over my head so please correct me if I'm wrong anywhere. The basic idea is that the Chinese government purchases enough US T-Bills to control the supply and demand such that the currency markets maintain the peg of approximately 8.23 yuans to 1 dollar conversion.

[/ QUOTE ]

The yuan is LITERALLY pegged to the dollar at the rate of 8.28 to 1. It is not subject to fluctuation on the foreign exchange markets and cannot be manipulated by central bankers.

Central banks from other Asian countries with floating currencies, such as Japan and South Korea, do participate in currency manipulation as you describe. They buy massive amounts of dollars under the rationale that it will devalue their own currency and make their exports more competitive. This in turn fuels our massive deficit spending.

The US government does not need to take any action to counter this manipulation. The US consumer does it for them whenever they buy a product that is made outside the US. That money is eventually repatriated into some other foreign currency, ultimately devaluing the dollar.

Regardless currency manipulation is just a short term solution to a long term problem. The only permanent solution to a trade deficit is to produce a product that is competitive in the global marketplace.

[ QUOTE ]

From an individual perspective, does buying a small amount of Chinese Yuan make sense in the hopes that the currency may float eventually? This seems to have little risk if the peg is maintained, but high potential upside. Assuming of course that the currency is indeed being artificially undervalued by China's monetary policy as many believe.

[/ QUOTE ]

Your logic is correct... The problem is that everyone in the world is already aware of this and has loaded up on Chinese yuan denominated assets. There is already billions of dollars of hot money fueling massive asset bubbles in China. What will happen after the yuan is revalued and when all the money comes flowing out? If you figure it out, please let me know!

[/ QUOTE ]

[player24]

[ QUOTE ]
What will happen after the yuan is revalued and when all the money comes flowing out? If you figure it out, please let me know!


[/ QUOTE ]

Here is the "doomsday" scenario (not the only possibility, but worth considering):

There will be a big drop in foreign demand for US Treasuries.

US interest rates will rise.

The housing bubble will burst.

Construction employment and consumer spending will fall.

Falling home prices will lead to a wave of personal bankruptcies.

It will be more expensive to shop at Wal-Mart (imported goods inflation).

Inflation will put pressure on the Fed to tighten monetary policy (which will lower growth and result in staflation).

Ultimately, the US experiences a 1930s depression/deflation scenario.

Risk mitigating factors:

The aforementioned scenario helps no one (this hurts everyone in the short term, including/especially Asian exporters). Therefore, central banks will go to great lengths to ensure that a Chinese currency revaluation is controlled in terms of timing and magnitude. A full "float" could be diasastarous.

Globally, we are in a very low yield environment. US Treasuries (which have 'relatively' high yields) will retain some of their appeal to foreign investors (although a free-fall in the dollar will over-ride this appeal).

Policy issues:

In the long term, the US manufacturing sector will benefit from a controlled revaluation.

It might be better to pop the US housing bubble sooner rather than later.

Finally:

Doomsday scenarios rarely ever occurr.

[imported_bingobazza]

[ QUOTE ]


Finally:

Doomsday scenarios rarely ever occurr.

[/ QUOTE ]

I hope they find more oil soon...

[RYL]

[ QUOTE ]
[ QUOTE ]
What will happen after the yuan is revalued and when all the money comes flowing out? If you figure it out, please let me know!


[/ QUOTE ]

Here is the "doomsday" scenario (not the only possibility, but worth considering):

There will be a big drop in foreign demand for US Treasuries.

US interest rates will rise.

The housing bubble will burst.

Construction employment and consumer spending will fall.

Falling home prices will lead to a wave of personal bankruptcies.

It will be more expensive to shop at Wal-Mart (imported goods inflation).

Inflation will put pressure on the Fed to tighten monetary policy (which will lower growth and result in staflation).

Ultimately, the US experiences a 1930s depression/deflation scenario.

Risk mitigating factors:

The aforementioned scenario helps no one (this hurts everyone in the short term, including/especially Asian exporters). Therefore, central banks will go to great lengths to ensure that a Chinese currency revaluation is controlled in terms of timing and magnitude. A full "float" could be diasastarous.

Globally, we are in a very low yield environment. US Treasuries (which have 'relatively' high yields) will retain some of their appeal to foreign investors (although a free-fall in the dollar will over-ride this appeal).

Policy issues:

In the long term, the US manufacturing sector will benefit from a controlled revaluation.

It might be better to pop the US housing bubble sooner rather than later.

Finally:

Doomsday scenarios rarely ever occurr.

[/ QUOTE ]

This is EXACTLY why we need oil. Any other option, such as imposing tariffs, could be extremely detrimental to the US economy, IMO. I think the next stop after Iraq is Saudi Arabia. We need to train over 100,000 Iraqi troops and police officers.

Click below.
Oil

[player24]

Okay, you want to raise the issue of Oil?

I 'lied' before when I suggested that depression/deflation was the worst case scenario related to a Yuan revaluation.

Try this one on for size:

China grows concerned that the balooning US fiscal deficit will entice the US to pring money to escape the debt trap.

To protect the value of their vast reserves (currently held in dollars), China accumulates oil, gold and other physical commodities.

If China begins to hoard oil at the same time that other emerging nations are consuming vastly greater amounts of energy and production does not expand to meet demand - Ouch!

We could see an unprecedented surge in commodity prices, led by oil.

This scenario has me concerned enough that I own some gold in my portfolio for the first time in my life. (GLD tracks the price of gold bullion).

[RYL]

[ QUOTE ]
Okay, you want to raise the issue of Oil?

I 'lied' before when I suggested that depression/deflation was the worst case scenario related to a Yuan revaluation.

Try this one on for size:

China grows concerned that the balooning US fiscal deficit will entice the US to pring money to escape the debt trap.

To protect the value of their vast reserves (currently held in dollars), China accumulates oil, gold and other physical commodities.

If China begins to hoard oil at the same time that other emerging nations are consuming vastly greater amounts of energy and production does not expand to meet demand - Ouch!

We could see an unprecedented surge in commodity prices, led by oil.

This scenario has me concerned enough that I own some gold in my portfolio for the first time in my life. (GLD tracks the price of gold bullion).

[/ QUOTE ]

Nice way of hedging your risk.

P.S. I'm pretty pissed gas is over 2 dollars a gallon. It's doesn't effect me as much, but it effects my friends and the people who live around me.

[RYL]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
What will happen after the yuan is revalued and when all the money comes flowing out? If you figure it out, please let me know!


[/ QUOTE ]

Here is the "doomsday" scenario (not the only possibility, but worth considering):

There will be a big drop in foreign demand for US Treasuries.

US interest rates will rise.

The housing bubble will burst.

Construction employment and consumer spending will fall.

Falling home prices will lead to a wave of personal bankruptcies.

It will be more expensive to shop at Wal-Mart (imported goods inflation).

Inflation will put pressure on the Fed to tighten monetary policy (which will lower growth and result in staflation).

Ultimately, the US experiences a 1930s depression/deflation scenario.

Risk mitigating factors:

The aforementioned scenario helps no one (this hurts everyone in the short term, including/especially Asian exporters). Therefore, central banks will go to great lengths to ensure that a Chinese currency revaluation is controlled in terms of timing and magnitude. A full "float" could be diasastarous.

Globally, we are in a very low yield environment. US Treasuries (which have 'relatively' high yields) will retain some of their appeal to foreign investors (although a free-fall in the dollar will over-ride this appeal).

Policy issues:

In the long term, the US manufacturing sector will benefit from a controlled revaluation.

It might be better to pop the US housing bubble sooner rather than later.

Finally:

Doomsday scenarios rarely ever occurr.

[/ QUOTE ]

This is EXACTLY why we need oil. Any other option, such as imposing tariffs, could be extremely detrimental to the US economy, IMO. I think the next stop after Iraq is Saudi Arabia. We need to train over 100,000 Iraqi troops and police officers.

Click below.
Oil

[/ QUOTE ]

I don't think Saudi Arabia is next. I take back my comments.