Would 6RMB/ USD Be A Good Thing?: Part 2

Friday, November 2, 2007 9:30

Following my first post a couple of days ago, I wanted to post some of the responses I received a couple of weeks ago when I posted this question online. It is by no means scientific, but some of the answers were really well thought out, interesting, and though provoking.

To start that conversation I asked the following 5 questions:

1) Is the RMB really unfairly valued?
2) What should the RMB/ USD rate be?
3) Would a 6RMB/ USD have a net positive effect for the USD?
4) What are the up/ downsides to a 6RMB/ USD for the U.S.?
5) What are the up/ downsides to a 6RMB/ USD for the China.?

Now, I am by no means an economics expert, and I am not sure any of the authors of comments below are. What makes them interesting is that they are all coming from different backgrounds to report their views based on their own industries, geographies, etc. I hope you will consider their comments, and add yours at the bottom in our comments section as well.

Disclaimer: I have kept the entire thread in tack, but I have deleted the last names to provide some measure of anonymity. As several of the responses come from readers, I will leave it to them to stake claim to their comments.

Bing

You do have a good question.Those political people might not knowing China indeed or have to say something for some reasons.

Here are my views for your questions:

  1. RMB is not unfairly valued,as you may know China is still developing country,the exchange rate can’t be as high as someone’s wish and keeping stable would be good for both sides.
  2. The rate should based on market situation and time as well.
  3. I don’t think 6RMB/USD have net positive effect for the USD.
  4. Up for US would be more export goods,little bit more job opps,the downside is people have to pay higher price for goods from China,might more asset would be bought by Chinese as Japanese did in the past.
  5. Up for China will be buying oversea assets make more easiers, more imports,Down will be sell less low value goods to U.S,or low quality ones,less FDI,more jobless ect…

Cint

Weak politicians always look for someone to blame when they are not capable to have financial discipline. The US is spending more than they can have. By weakening the dollar to the Euro we now also are paying for the mistakes made in Iraq and other budget problems in the US.

I would say clean your own house, invest in your infrastructure and society, get away from short term solutions and also please stop spoiling most of the worlds natural resources.

Sorry for being so direct but as an entrepreneur I learn from my mistakes instead of looking for someone I could bring to court. I don’t like the attitude to blame others to get away from painful conclusions.

Jeff

This is a bit of a trick question. The RMB/USD exchange rate is only one part of the equation. The other side is the measure of what a single RMB is worth within China.

The huge trade deficits we are seeing right now are indicative of China’s lighting-fast ascendency into a powerhouse of commercial manufacturing. This is an unsustainable imbalance, but market forces are at work on both sides of it. The legislation and pressure in question is designed to impact the demand side coming from the US. If a single USD only gets 6RMB, all Chinese-manufactured goods will become more expensive for US companies and consumers. The idea is that this will curb demand and shift more manufacturing and consumption to domestic goods and labor.

On the other side of the imbalance is domestic inflation in China. As China is becoming a larger international consumer, its people are shifting towards a higher quality of life. Implicit in that shift are changes in consumption habits, expectations of environmental protection, social services, consumer protection, etc. All of these factors are powering domestic inflation. This is best seen in the urban real estate market in China, which has been skyrocketing. Over time, these higher domestic prices will trickle down into the lower levels of the labor force. Combined with the extra costs associated with ensuring proper product safety (to combat the huge tainted product recalls we have seen recently), it will gradually cost Chinese manufacturers more to manufacture their products. This will raise the prices (in RMB) that they must charge for their goods.

In my opinion, this adjustment must be allowed to occur, but cannot be forced too fast. Both populations are accustomed to the status quo, and a sudden shock would be bad for both countries. In the US, a sudden jump of 20% in the cost of manufacturing almost everything we see on our store shelves would be tremendously disturbing. In China, the impact would likely be huge job losses, which runs the risk of triggering significant socio-political upheaval.

Looking at how things are moving in both countries and around the world, I think 6RMB/USD (adjusted for Chinese inflation) is a likely possibility. The question is how long will it take to get there, and how smooth a ride can we all have on that trip.

Ric

If the US dollar hits 6 RMB it might keep falling as over seas buyers of US dollar credit see all their profits evaporate. They may start to dump dollar based assets in a panic, forcing the value ever lower. We may see the dollar well below 6 RMB in the next year or two.

It could be very bad for the US in general as well as the US economy in particular.On many levels

Jay

American politicians should really be careful what they wish for.

Do the honestly think that multinationals will move their factories back to the states? Do they think the US will export more products to China? The fact is that most US exports to China are either restricted by the Chinese trying to protect their markets or restricted by the US government trying to prevent the Chinese from gaining access to high technology goods. Some orders may be switched to other countries such as the “coalition of the willing” Jordan, Pakistan and South America but factories will not be relocated back to the US. Also keep in mind there are switching costs involved and now the China is developing its own economic engine these factories are in a good position to take advantage of the Chinese market.

If the RMB was rise to 6 to the dollar the only thing that would really accomplish is an increase in inflation to the US economy. This is not necessarily a good thing right now as the Fed has just dropped interest rates and this might cause the fed to have to raise interest rates too soon. Moreover, if the Chinese, who happen to have most of their reserves in US T-Bills, decide that they are not willing to accept this devaluation they could begin to transfer these assets to Euro denominated bonds. This would again increase interest rates in the US and be counter productive to what the Fed is trying to accomplish.

Clint is on the money with his comment about weak politicians. My bet is if you could trace the e-mail trail to the constituents that were behind the bill you would find they stand to make some serious monetary gains.

If politicians really want to help US business instead of trying to change the exchange rate they should be fighting for better Chinese market access for US products and services under WTO rules.

Joseph

In politics, anything that benefits me is “fair” and anything that hurts me is “unfair.” So whether the RMB value is fair or not really depends on who you are.

There is a lot of talk about the RMB rate because its easy for an American politician to blame China for everything that it wrong in the world. The problem is that the reason that there is pressure on the exchange rate is that the US has a persistent budget deficit. The deficit needs to be funded from somewhere.

If you change the RMB/USD exchange rate, then what happens is that the US deficit is funded via a tax on Chinese goods. Chinese goods are more expensive then they otherwise would be. This wealth then goes to fund the budget deficit.

The cool thing about this method of funding the deficit is that it’s not obvious to anyone that money is being taken from their pocket.

Anthony

The bigger problem here is the impact it will have on the economy. As has been said before it is easy to blame the Chinese, and although it will immediately cut the Trade Deficit, the truth is that it will more directly impact the lower and middle class who are all dependent on cheap chinese imports for everyday life. Wal-Mart accounts for 15% of the imports from China. Think of the impact that a 25% increase in prices would have on Wal-Mart alone. The prices of goods would go up, and the buying power of the lower-middle class would be negatively impacted. They currently employ 1.3 Million People in the US. In order to compensate for the shift in price how many of those employees would lose their jobs? This is only the impact on Wal-Mart. Think of all the other discounters, retailers and companies in the US that depend on these imports. In 2004, 80% of US consumer goods came from China.

If this is in order to curb imports in general (a political move to gain votes), then so be it, but the reality is that more jobs are created by imports then lost, it is merely a shift from manufacturing to port related activities.

What the true problem here is the disconnect between the reality that is, politicians and the american pubic that votes for them. It is no coincidence that all of this started leading up to an election year. Where the lower/middle class is taking a beating due to poor borrowing practices in the sub prime market.

Jason

  1. I think at this point, the falling dollar against almost all the major world currencies will suggest a trading range of 6-6.5 RMB is not necessarily unrealistic in the next 6 months. A year ago, I would have said 6 was too low an exchange target.
  2. January 1, 2008 — I’ll bet you A Tsing Tao that it’s in the 6.5-7.0 range. Later in 2008, look for a drop.
  3. America has a period of reckoning coming from an import price perspective thanks to the falling dollar. This has the potential to cause serious inflation in consumer products, food, etc. Positive? Long-term, maybe. But short-term I’d say it will be challenging times unless the dollar rebounds overall.
  4. Downsides: rising import prices (in general), finished products pricing goes up in the domestic US market, etc.Upside: the US begins to invest in China for the right reasons. Good for US export markets as well.
  5. From a manufacturing perspective, Darwinism in industries with less value-added content accelerates. Good long term for overall economy, as China builds closer ties to Europe and other markets beyond the US.

Eddie

  1. Yes – probably!
  2. Free up the market and see what it does! Just watch the fireworks as the capital market hasn`t developed enough yet to cope with such a move. Do that first on a tick off list!
  3. Probably not – more impact if you can get the CAD, EUR, CHF, AUD & JPY to weaken or slow their strengthening.
  4. Probably better BOP but you sit their watching to see if they off load their hoard of US treasuries.
  5. Kick starts modernization – which means more unemployment – which puts you at risk of your former workforce turning against you (especially the disenfranchised or those who believe they have not participated in the economic miracle.

Josh

The initial question is fairly ambiguous and open-ended, which I suspect is part of the point (to open a discussion). It seems from the wording that you mean from a US point of view, so I will offer my opinions based on that set-up.

As you all know, China has been re-valuating its currency over the past year and a half. Over that period it has gained about 10% against the dollar and is steadily going up. Efforts by attention-grabbing Senators like Schumer (D-NY) and Graham (R-NY) have done little good, and probably slowed down the floating process as Chinese officials respond better to quiet diplomacy rather than public castigation (Americans do as well). We should remember that during the Asian Financial Crisis many in the international community urged China to devalue its currency, which it did not do. Had they done so it would likely have WORSENED the crisis, so Beijing’s policy may be based on more than self-interest and stubbornness.

On to the specific questions:

  1. ‘Unfair’ is a bit normative, but clearly it is not accurately valued.
  2. This is for the market to decide as China will be able to un-peg it (completely) shortly if it chooses to do so
  3. For the US currency itself a 6/1 ratio would probably not really make much of a difference.
  4. A 6/1 currency would bring it more in line with its true value, which would help US exporters, hurt importers, and obviously do the reverse for the Chinese. However, for those people who think a ‘fair’ currency valuation is going to bring manufacturing jobs back to the States, they are mistaken. Many jobs are already leaving China for Southeast Asia much as the migrated from Mexico to China just over 10 years ago. A higher currency valuation may hasten that shift to Vietnam and Thailand.

Romain

US Dollar, Euro and RMB: this is the love triangle of the 21st century. The RMB isn’t high enough according to US and European officials but the latest also blame the US to have a currency to low impending exports to the US currency zone. However, European Union are also happy that their currency is high because they can buy oil at a cheaper price despite the fact the oil price is rising.

If you want a straight answer to your question. If the RMB is at 6 against the USD, more companies will move inland and they will need a drastic improvement of productivity and infrastructure. With a higher RMB they will be able to import more machines or consumer goods.

You can leave a response, or trackback from your own site.

11 Responses to “Would 6RMB/ USD Be A Good Thing?: Part 2”

  1. Josh says:

    November 2nd, 2007 at 10:19 pm

    It’s great that you did this Richard. I think it’s great to get all these different views. I am the anonymous “Josh” up there, and probably had the least interesting thing to say.

    Around the same time you posted this question I took a somewhat less serious stab at the issue, wondering what a world with a 1:1 ratio (IE- like the Canadian Dollar) would look like. You can see it on my old website:
    http://www.chinaexpat.com/blog/josh/2007/10/25/what-if-rmb-and-dollar-were-same.html

    and here’s a shameless plug for my new website, because I’m not above that:
    http://www.cupofcha.com

  2. Jay Boyle says:

    November 2nd, 2007 at 11:02 pm

    I stand behind what I wrote above.

    However since I wrote it I am seeing signs of serious inflation in the Chinese Economy. Not in just pork and gasoline prices but wage pressures on the factory floor. The factory managers in the Shanghai, Jiangsu, Zhejiang that I have talked with in the last month are complaining that workers are asking and getting on average 20% wage increases. I guarantee you that productivity is not increasing by 20%.

    China needs to turn off the printing press. Interest rates are not nearly high enough here for depositors to keep their money in the bank. So we see ridiculous stock market valuations instead.

    If the Chinese could readily purchase gold I do not think you would see the those stock market valuations

    There are numerous examples in history that when interest rates do not stay above inflation the consequences can be destabilizing and neither China nor the rest of the world wishes to see a destabilized China.

    Jay

  3. Rich says:

    November 2nd, 2007 at 11:02 pm

    Hi Josh,

    All shamelessness aside, congrats on the new posting and good luck with Cup of Tea.

    R

  4. Rich says:

    November 2nd, 2007 at 11:36 pm

    Jay.

    Good to see you have placed your stake along with Josh!

    One area that I would like to challenge you on is where you said that US manufacturers should push for more market access in China.

    After all, Motorola is not exporting phones from US anymore, they are manufacturing in Tianjin.

    Shouldn’t the US focus on services ……. what has been the main driver in GDP of US economy for many years ……. See the

    WSJ article A Services Surplus

    Have a good weekend!

    R

  5. Jay Boyle says:

    November 6th, 2007 at 1:59 am

    Hi Rich,

    What I really said was.

    “If politicians really want to help US business instead of trying to change the exchange rate they should be fighting for better Chinese market access for US products and services under WTO rules.”

    The services are definitely in there and very important part of the picture. I will come back to that. But first want to clear up a misconception about what I am referring to as US products. Let’s face it, most US companies are not manufacturing their products stateside and exporting to China now but making them here for local consumption.

    The market access I was mentioning are restricted industries that should be open under WTO rules or barriers that protects local and state-run players in the local/regional markets from the foreign firms trying to compete here in China.

    What is interesting is many of these barriers also hurt Chinese firms from other provinces.

    Any foreigner that has lived here a while can certainly see the lack of services and how foreign firms can compete but they are still restricted. China has kept these services out to protect its own industry but it may be hurting itself in the long run. If you talk to management at the companies that were involved in the lead paint/melamine/tire recall crises this summer you will learn they did not carry product liability insurance much less reserver for warranties. An open market in the insurance industry is just one example that would have helped these companies weather these crises.

    If foreign banks were allowed unlimited access to the market how much more efficiently would capital be allocated? How

    Lou Dobbs and his paranoid followers are constantly focused on the trade balance. However, the economy has changed too much over the years. We should be focused more on the Current account as opposed to trade account and we should also be looking at dividends and royalties in the capital account with special attention on the enforcement of the payment of these royalties. In the last 6 years of doing due diligence in China I have yet to find a Chinese firm that was paying the correct royalty on IP. Some even outright stole process patents.

    Jay

  6. China Economist says:

    November 6th, 2007 at 7:12 am

    Interesting comments. However, the problem is not with the comments but with the questions. I am afraid economists would percieve the questions to be missing the point rather.

    Brad DeLong wrote a related piece on this and I have also covered exchange rate issues in the China Economics blog under the “exchange rate” tag.

    My answers are:

    1. Undervalued against whom? The US is only one country of many.
    2. From who’s perspective? China’s, America’s or any other country (who are impacted directly and indirectly by the exchange that China manages.
    3, 4 and 5: There are many factors at work here. For example, the US will benefit as China exports become more expensive (saving US jobs maybe), helping US exporters, closing trade deficit (does that really matter?), China gets cheaper inputs (US machines etc.), China may lose jobs (the main reason that China does NOT allow the Yuan to float freely.

    Whilst the economics important the exchange rate is politically driven. The Brad DeLong article makes for interesting reading:

  7. Rich says:

    November 6th, 2007 at 8:05 am

    China Economist.

    The point of the questions was really to generate discussion that included different perspectives from U.S., Chinese, and other perspectives (essentially anyone on Linked in). I know they were a bit wide, perhaps poorly constructed, but I wanted to see what was on the minds of others….

    I have read Brad’s views and think they are interesting as well, and I would also hope that readers go there and read his views. however, i tend to follow Jon Anderson of UBS and I recently read a Carnegie report (see post tomorrow that addresses inflation) for a bit more technical and operational analysis of the underlying economics.

    Hope you will stop back in tomorrow when my post of the Carnegie report goes up and let us know how you think that plays.

    R

  8. Gareth says:

    November 9th, 2007 at 8:53 pm

    If the Chinese gave out their real GDP and economic statistics, maybe everyone would understand why they can’t lower the vale of the RMB. If the GDP in China is rising so fast, then why are the MAJORITY of Chinese (no, not the elitist in top tier cities) experiencing a much harder life than 10 years ago? Shouldn’t an increase in GDP mean that life gets better not worse for the majority? If the Chinese can stop bullshitting about their economic ‘miracle’ maybe the US won’t put so much pressure on them to play fair.

  9. Rich says:

    November 9th, 2007 at 9:58 pm

    Hi Gareth.

    While I will agree that china still has a long way to go before we can consider the dream complete, I am not sure I share your view.

    In terms of the majority of Chinese having a “much harder life”, I would be interested why you say that. Sure, there are a LOT of people who have seen little benefit from the last 10 years, but outside of laid off SOE workers, I am curious what other group you feel has slide backwards.

    for me, the visits I make to the 2nd tier cities has offered a lot of proof that things are headed in the right direction. Take Chengdu, Wuhan, or Nanjing as examples. Each have seen growth rates that are faster than the overall GDP, and each for different reasons (they attract very different investors). As these cities are coming up, we are as a result seeing increased consumers in those economies, but more importantly we are seeing where people are choosing to move to those cities rather than the east coast… a good sign in my eyes.

    One last thing I would disagree on is that it is not the Chinese spouting the “economic miracle”. It is the Western press that has done this more than anyone, and that has carried through with 10s of thousands of business people traveling to China to get their piece of the pie. Many have, many have not… but more than that, very few have done anything to really contribute to anything but their own bottom lines…

    Would be interested in hearing your thoughts, seeing some evidence, of your statements. Having reviewed your blog, I can see that you are not a Panda lover, and that is fine, but I need something tangible to buy into

  10. Emil says:

    November 27th, 2007 at 7:16 am

    Having no expertise in international economics I will still say that I find it unlikely that US imports from China will be reduced as rapidly as the Politicians are hoping to raise the value of the RMB – generating the ironic effect of a higher trade deficit from paying more money for the same goods.

  11. Rich says:

    November 27th, 2007 at 7:41 pm

    Emil,

    That is an excellent point, and one I am seeing in industries where China holds the majority of the manufacturing capacity. Sure, there are some firms who are being detoured from entering China, but for those that are now see margins erode the only reaction is to raise their pricing for the same good.

    Nice how that works out

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