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Aug. 3rd, 2008 02:16 amI feel like after the last post there needs to be a little explanation about Chinese economy. As I said before, all I know is non-disciplinary, which means I won't be using the proper terms and stuff.
Brian said, "part of the problem facing China is that they have too many dollars, and investors apparently respond to this problem by using the strong yuan to buy more dollars, which they already have too many of. This is nonsensical",
and Alexis asked a question about "how is lack of domestic investment America's fault?"
So let me try to, um... explicate? Please correct me if I'm wrong.
Alexis' question first:
Whenever foreign money goes into China, money isn't actually exchanged. For example, if I go to a Chinese bank and say, "I'd like to exchange this $100," they don't magically change it. Instead, what happens with international money is that they take my $100 and put it in a "foreign reserve". And then they give me brand spanking new 700 rmb that's in the hands of me, a foreigner. This has two effects:
- One, China has a lot of foreign reserve of American dollars -- buying power in America, not in China. So they end up buying bonds. In America.
- Two, China is printing lots of rmb for the foreigners to use. And what happens when you increase the supply of money? Inflation. Which is bad. To prevent inflation, China takes in the domestic rmb and destroys it, bringing the money supply back to normal. But this means there's less domestic rmb floating around for domestic investments.
So it's kind of like having a pool of 1000 rmb. They used to be held by Chinese people. But I come in with my $100. I say "here, I want to exchange this money," so they take 700 rmb out of the hands of the Chinese people and give it to me. And they have a shiny $100 bill that they can't use in China. So they ask me, "do you have anything to sell?" I'm like ... "um... democracy?"
Now, Brian's question. Indeed! It seems nonsensical. Except that it benefits the foreigners. It's like playing the stock market. If I convert my $100 to rmb right now and get 700rmb. Then I wait a year and convert it back to USD, I'd get, like, $130. Yay $30 profit! But the Chinese government won't let me speculate blatantly. So I say to a Chinese company, "Hey, wanna make a quick buck? For every $30 I get in this way, you get $10." And the Chinese company's like, "60 rmb? All right!" And then the company turns around and tells the Chinese stock market, "dudes, I'm making money!" And the everyday people then speculate on their stock, and it's all a big mess. So yes, it is nonsensical, except very profitable for a small subset of people.
Again, my ideas about econ is quite shoddy. (A mixture of High School Econ and listening to a professor for an hour last year) Please correct!
Brian said, "part of the problem facing China is that they have too many dollars, and investors apparently respond to this problem by using the strong yuan to buy more dollars, which they already have too many of. This is nonsensical",
and Alexis asked a question about "how is lack of domestic investment America's fault?"
So let me try to, um... explicate? Please correct me if I'm wrong.
Alexis' question first:
Whenever foreign money goes into China, money isn't actually exchanged. For example, if I go to a Chinese bank and say, "I'd like to exchange this $100," they don't magically change it. Instead, what happens with international money is that they take my $100 and put it in a "foreign reserve". And then they give me brand spanking new 700 rmb that's in the hands of me, a foreigner. This has two effects:
- One, China has a lot of foreign reserve of American dollars -- buying power in America, not in China. So they end up buying bonds. In America.
- Two, China is printing lots of rmb for the foreigners to use. And what happens when you increase the supply of money? Inflation. Which is bad. To prevent inflation, China takes in the domestic rmb and destroys it, bringing the money supply back to normal. But this means there's less domestic rmb floating around for domestic investments.
So it's kind of like having a pool of 1000 rmb. They used to be held by Chinese people. But I come in with my $100. I say "here, I want to exchange this money," so they take 700 rmb out of the hands of the Chinese people and give it to me. And they have a shiny $100 bill that they can't use in China. So they ask me, "do you have anything to sell?" I'm like ... "um... democracy?"
Now, Brian's question. Indeed! It seems nonsensical. Except that it benefits the foreigners. It's like playing the stock market. If I convert my $100 to rmb right now and get 700rmb. Then I wait a year and convert it back to USD, I'd get, like, $130. Yay $30 profit! But the Chinese government won't let me speculate blatantly. So I say to a Chinese company, "Hey, wanna make a quick buck? For every $30 I get in this way, you get $10." And the Chinese company's like, "60 rmb? All right!" And then the company turns around and tells the Chinese stock market, "dudes, I'm making money!" And the everyday people then speculate on their stock, and it's all a big mess. So yes, it is nonsensical, except very profitable for a small subset of people.
Again, my ideas about econ is quite shoddy. (A mixture of High School Econ and listening to a professor for an hour last year) Please correct!
