summercomfort | (no subject)

I 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!

Flat | Top-Level Comments Only

Hey, Sushu. Is there any political traction in China at all for unpegging the Yuan from the US dollar?

It seems like a lot of the problems that China is having are caused by having their currency pegged to a currency that's, well, rather unstable.

Um... I'm not too clear about this. I'll ask. But I think you have to peg it to the dollar because it's the most traded currency? (like, 80% of the market?) Plus it's the most recognized and China has oodles of it? I personally think they should peg it to the Euro or something but hey, what do I know?

I understand the currency speculation stuff (except for the part where doing it in conjunction with a Chinese company makes it legal). Even though you're not making a profit in yuan, you are making a profit in dollars, which is fine with you if you're an American speculating on Chinese currency.

Except that this is where market forces are supposed to come into play. If doing this is really so profitable -- if American speculators are really trying to buy yuan en masse -- the effect should be a further weakening of the dollar versus the yuan. The market should quickly come to equilibrium, until the dollar can buy fewer yuan and it's not worth investors' while to continue the cycle because the motion of the dollar versus the yuan is no longer so predictable. Profit should be nowhere near 30% annually. If it is, Chinese banks should obviously be charging a lot more dollars for yuan, and giving fewer dollars back for yuan -- especially if dollars are so useless to the banks.

So if the problem you describe is real and not the product of your uncle's paranoia, something is stopping market forces from operating. There are a few possibilities I can think of here.

1: Chinese banks are irrationally agreeing to suboptimal deals -- deals that extract a lot less from foreign speculators than the banks should be able to. Let's assume Chinese banks are run by savvy businessmen who aren't prone to underplaying their hand, which rules this one out.

2: The market is structured to prevent proper operation of market forces. This is my bet. It sounds like there are substantial barriers to entry for currency speculators, put in place by the Chinese government. Only very well-placed investors (able to contract with Chinese firms) can enter the market. With less competition they're able to extract stupid good deals, like monopolists. If this is true, removing regulations about currency speculation would allow the market to equilibrate and prevent the exploitative trading you describe.

3: The market is equilibrating, but it's not finished yet. The dollar actually should be a lot weaker versus the rmb than it is right now, and the cycle of turning dollars into yuan into dollars is a short-term phenomenon. When it ends, the problem goes away, and China walks out a winner because it has the same number of yuan it had before, but is now able to use them to buy massive quantities of American imports. This could be the case; I don't know how long currency markets usually take to come to equilibrium.

Just my thoughts. In none of these scenarios, by the way, are Americans the bad guys -- or at least, no more so than the Chinese. It seems unreasonable to say "American businessmen should stop trying to make a profit off the Chinese, but Chinese businessmen don't need to exercise the same discipline."

> 3: The market is equilibrating, but it's not finished yet. The dollar actually should be a lot weaker versus the rmb than it is right now, and the cycle of turning dollars into yuan into dollars is a short-term phenomenon. When it ends, the problem goes away, and China walks out a winner because it has the same number of yuan it had before, but is now able to use them to buy massive quantities of American imports. This could be the case; I don't know how long currency markets usually take to come to equilibrium.

I think it's this reason. I mean, the Chinese yuan is going up now because it was artificially low for so many years. (I think it started floating... 2 years ago?) So now it's just slowly rising to reach is natural value (which I think is supposed to be about 5rmb/dollar?). You're right, it doesn't grow by 30% a year. I think last year it was at around 7.3 to the dollar? And this year it's at 6-ish? Which is like, 20%?

Of course, the problem here is that people aren't sure that China will walk out a winner -- they don't really need to buy American exports -- their economy is based on export *to* America, which they're losing anyway because of their rising exchange value. And what about the large amounts of USD in their hands? For them it's like, "wait, I thought I had this much $$. Now I only have 75% of that?" And then they go D:

> Just my thoughts. In none of these scenarios, by the way, are Americans the bad guys -- or at least, no more so than the Chinese. It seems unreasonable to say "American businessmen should stop trying to make a profit off the Chinese, but Chinese businessmen don't need to exercise the same discipline."

I agree. As I said in the last post, what was very frustrating about these conversations is the blame game. And not saying, "Hey, China was totally happy about exchange rates 5 years ago... when it was Artificially Low." Really, what I hope for is the rise of China's domestic industry. Stop selling to America. Sell to your own people.

I know that #1 was often the case in the '80s, when China completely prohibited foreign banks from coming in. This resulted in a ton of government bailouts for banks as various businesses defaulted on their loans. I get the impression it's better now than it used to be, though.