Bonddad is on this breaking news: “Yuan Revaluation: Not a Cure All.” “This is a surprise move that caught everyone off-guard,” writes Bonddad.
“BEIJING – China dropped its politically volatile policy of linking its currency to the U.S. dollar on Thursday, adopting a more flexible system based on a basket of foreign currencies that could push up the price of Chinese exports to the United States and Europe.” (Full story: AP/Yahoo News, via RawStory)
I don’t know enough to say what this might means…I’d ask Jerome, but he’s at the bech. What’s your take on the meaning of this?
If indeed it raises the currency rate, so Chinese goods are more expensive, I’d hazard a guess Europe and America will be happy. Is there anything else behind this?
According to Edward over on a fistful of euros,
Still, any shift in this direction is basically good news.
Microeconomics would predict that when you have a trade deficit that this happens in part because imports are systemically undervalued, while exports are systemically overvalued. Usually, when microeconomic predictions don’t hold up it is due to some regulatory or governmental involvement in the market. What factor in the economy can create that kind of systemic problem? The most obvious is the exchange rate. And, it so happens that there has been a very heavy handed control of the China-U.S. exchange rate by China. Easing this up should tend to cause the Yuan to become more valuable vis the dollar (per microeconomic theory). This in turn should tend to cause U.S. exports to sell better in China, and to give domestic U.S. manufacturers help vis Chinese manufacturers.
If the factor is small, it won’t have a big impact, but a move in the right direction both helps to determine if the exchange rate was really out of wack as suspected, and also points to the direction we need to take if we want to solve the problem.
SO my understanding is that we have been able to float T-bills at low rates because the Chinese have been willing to buy them to continue their fixed-rate peg to the dollar. So one outcome (from not a macro-economist) is that the US will have to pay a higher rate to continue to sell debt. The risk there is that the higher rates will transform into lower house prices. Then lower house prices will put a damper on consumer spending. This will halt any recovery.
Alternatively, as is always the case, it could mean nothing, just diplomatic posturing. And I think, given the tiny change, that is exactly what it is.