Carefree asked:
Why is America getting so upset about the possibility of China devaluing its currency? Is it really that bad? Surely it will help countries that import goods from China?
Dale
Why is America getting so upset about the possibility of China devaluing its currency? Is it really that bad? Surely it will help countries that import goods from China?
Dale
By making their money cheaper it makes their goods cheaper. So, yes, people buy more from them cheaper.
But that moves money to China, it drains money from the United States that because they are making OUR goods MORE expensive they don’t buy from us.
Exchange rates if are allowed to operate in a free market, float normally, their money would increase value to balance the unfair, unequal trade balance, making our goods cheaper and they would buy more from us.
But China is controlling their money value by manipulation to drain money from other countries.
Comment by Thor — March 21, 2008 @ 9:17 am
Rule of thumb is whenever government interferes, there’s inefficiency. By holding their currency cheap, China is bringing unfairness to trade between them and those countries who play fair game (by not interfering to their currency rates). Thus China is getting current account surplus and US is getting current account deficit. (although there are other source of this deficit besides currency rates). You can also observe how China’s forex reserves are growing. Some economists view this as not necessarily negative. Since Capital inflow to the US should balance out. Since there’s investment surplus in the US. However we have to pay interest and dividends for these investments.
Comment by Mike G — March 21, 2008 @ 3:34 pm