Watching the Yuan

One of my many, many complaints about the financial media is its alarmism. (This also applies to some prominent financial academics as well.) Everyday, it seems, we’re told about a new Major Concern, that Must Concern Us All. If not addressed, the Major Concern will become a Serious Problem with Serious Repercussions. The longer we ignored the Major Concern, the worse it will get.
And usually, the Major Concern goes away. Sometimes it’s replaced by a younger and thinner Major Concern. Remember the Housing Bubble? It turns out, that was sooo last year. Nowadays, we have to be worried about oil prices. And gold prices! Don’t forget copper! Of course, no one ever calls it a gas bubble (okay, all bubbles are gases, smartie).
In the media’s eyes, when the bad things go up, we’re selfish users. When good things go up, we’re selfish speculators. If you pay attention, you might be able to spot some similarities.
Anywho, there really are things to worry about. But usually, they’re not what everyone else is worried about. And that’s what makes them so troubling. The real mischief is hidden in broad daylight.
Yesterday, China allowed its currency, the yuan, to rise above eight to the dollar (meaning lower than eight, confusing I know). In foreign currency terms, this was a tiny move, about 0.1%. But on the symbolism front, it’s equivalent to one enormous spring roll.
The Chinese government is slowly falling to pressure from the United States to adopt a “more flexible” currency policy. More flexible is diplospeak for “higher dammit.” The U.S. has been seriously pissed that China has pegged its currency too low. Last year, China finally allowed its currency to float. Well…not float float. I guess you could call it “semi-submerged.”
So now everyone is happy that the yuan is going up. Almost everyone. Enter Robert Mundell. He thinks a stronger yuan is a big, massive dumb ass mistake. Although he’s an economist, he might know what he’s talking about. Mundell is one the world’s leading currency experts. He’s a Nobel laureate and considered to be the Father of the Euro (I’d still call for DNA testing, but that’s me).

Mundell says such admonitions are not in China’s interest and would bring about huge problems such as threatening its already wobbly banking system beset by bad loans, cause deflation, increase unemployment, reduce net foreign investment and cut economic growth.
“I think it might drop the growth rate from 10 percent down below 5 percent,” he said. “And that would get the growth rate down to those dangerous levels that they got in 1989 and 1990, the years of the great dissent connected with the Tiananmen Square problem.”
Mundell said China’s stunning growth has given it a much bigger role in Asia’s economy, which wouldn’t be able to escape the effects of ill-advised currency moves by authorities in Beijing.
“It would lower and destroy this process that’s been so important to all Asia, this kind of vertical integration of the Asian economy where the more advanced countries like Korea and Japan have been sending their products to China to be finished and re-exported to the United States,” he said.

The problem that our policy makers don’t see (and this is very far from a partisan issue) is that we may be forcing China to follow the same path as Japan. A higher yuan could cause a deflationary slump. Once started, those aren’t easy to stop.
Or there’s another question. How do we know that the yuan is too low? What if it’s not? Perhaps the reason why we have a massive trade deficit is—how can I put this—because we need to have a massive trade deficit. If not China, there’s always India. Also, it was because the yuan was tied to the dollar that helped stem the Asian financial crisis of the late-1990s.
Senator Chuck Schumer of New York said, “given the importance of this issue, we should approach it with a calm understanding of the facts and not resort to shameless grandstanding.” No, I’m kidding. He’s being a screaming moron. Schumer and Lindsey Graham have sponsored a bill that would impose a 27.5% on all Chinese goods. Why 27.5%? That’s what they claim the yuan is undervalued by.
As for me, I can’t say exactly why the yuan is where it is. But…there it is. And now we’re screwing around with its value for political reasons. There’s your Major Concern right there.

Posted by on May 16th, 2006 at 7:05 am


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