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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (749)	9/16/2003 6:42:02 PM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

"... Before one can analyze this situation, it is important to understand that no one knows what the dollar-yuan exchange rate would be in the absence of pegging. Many currencies that float freely are often thought to be overvalued or undervalued for various reasons. So simply eliminating the peg does not guarantee that the yuan will rise. Indeed, some economists believe that the yuan might fall if China eliminated capital controls -- which it would have to do in order to have a free float -- and allowed its citizens to invest their savings outside the country. Another thing to keep in mind is that it is just about impossible for a country to undervalue its currency against just one other currency. Currency traders would engage in arbitrage to take advantage of this anomaly to buy and sell other currencies so as to undermine the effort. In other words, the Chinese couldn't keep the yuan undervalued against the dollar without also keeping it undervalued vis-a-vis the yen, the euro and other currencies. So if the yuan is in fact undervalued against the dollar, then it is also undervalued against all other currencies. But if the yuan is undervalued against all currencies, then it should be running a trade surplus with every country, not just the United States. In fact, China runs an overall trade deficit. Its surplus with us is more than offset by deficits with other countries. Finally, it is worth remembering that if the yuan is truly undervalued against the dollar, then it is like giving every American a 40 percent discount card on everything made in China. Our real incomes are higher in terms of what they will buy because of the Chinese policy. Instead of complaining, we should all be grateful. Of course, there are those who will point to jobs in the United States that have been lost due to competition from Chinese imports. But is this really a sensible rationale for putting tariffs on Chinese goods, as Sen. Charles Schumer, D-N.Y., proposes? If Wal-Mart suddenly decided to cut the prices on all its goods by 40 percent, would Schumer endorse a tax on Wal-Mart because Target was losing jobs? I think not, but the analogy is accurate." Message 19311331