China Seems Set to Loosen Hold on Its Currency

[TomCADem]

Source: NY Times

HONG KONG — The Chinese government is preparing to announce in the coming days that it will allow its currency to strengthen slightly and vary more from day to day, people with knowledge of the emerging consensus in Beijing said on Thursday. The move would help ease tension with the Obama administration about the United States’ huge trade deficit with China.

China’s exports have been bolstered by its policy of keeping its currency, known as the renminbi or yuan, pegged at a nearly fixed rate to the dollar. Many members of Congress and economists say that by spending several hundred billion dollars each year to hold down the value of the renminbi, China has made its exports extremely competitive in foreign markets and taken away sales from manufacturers in the United States and other countries.

But if China allows only a small move in the renminbi, the effects on the American trade deficit may also be small. Chinese companies are formidably competitive and, while labor costs are rising in China, transportation and communication costs are plunging because of heavy investment in new expressways and rail lines.

A marginally stronger renminbi would make Chinese goods only marginally more expensive in the United States and make American goods slightly cheaper in China, which is now exporting more than four times as much to the United States as it imports.


Read more: http://www.nytimes.com/2010/04/09/business/global/09yuan.html

[David__77]

1. "Labor costs in China are rising." That means Chinese workers are paid more.

We will see in the coming decades whether the theory of "international factor movements" is correct, and that the gap between the developed and developing world closes once and for all.

As for the currency issue, at all costs, China must never allow itself to go the way of some Asian countries that crashed in the late 90s financial crisis - freely traded currencies are a problem and not a solution. The dollar shouldn't float either.