By Relmor Demitrius
On Saturday it was announced that China had finally agreed to allow a revaluing of the Yuan, which is pegged to the dollar, to allow for greater appreciation of the currency. This has been long sought after by the world economies who have complained for years China enjoys an artificially depreciated currency compared to the major global currencies such as the Yen, the U.S. Dollar, and the Euro.
China uses their currency trade surplus to buy foreign currencies, hence artificially making that currency stronger. China enjoys a trade surplus, which is a foreign term to American investors who have long dealt with the term trade deficit here. Basically China makes more on what they export than on what they buy as imports. This is slowly changing however, but for now remains true. China is now a net importer of oil, a sign this dynamic of China may be slowly changing.
Since China has extra money, they use it to buy other currencies keeping those currencies stronger compared to the Yuan. This keeps Chinese exports cheap in comparison to other economies.
Since the Yuan is pegged to the dollar, any depreciation in the U.S. currency would cause the Yuan to stay in a relative “always cheap” balance, as the ratio now is around 6 to 1, meaning 6 Yuan per dollar. Basically no matter what we do to deprecate our currency, the Yuan will always be cheap. This new measure for the Chinese banking system will now allow for the possibility of that ratio to come down, hence making our products cheaper in China, and theirs more expensive here. This will be an advantage to our economy. Futures markets, the dollar index, and oil are responding to these moves in early morning trading. Short term the effect will be hard to guess, but long term this move is beneficial. Ironically Chinese purchasing of our treasuries allows us to keep being able to purchase Chinese goods, as their economy is 30% reliant on sales to the United States. So not only does China buy our debt, they buy our currency as well. This complex and bizarre cyclical relationship with China will continue for years to come, and looks like China might finally be bowing to world pressure. When your the fastest growing large economy in the world, and the world needs to buy your products in order for your country to survive, its best not to cause your customers to go broke.
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