The Free Associator

The Philadelphia Syndicate is a collection of writers, businesses, artists, musicians, and activists based in Philadelphia, with connections to associates around the world via the internet. This publication is produced by members of the Syndicate's private online discussion forum for the purpose of giving exposure to the organization's thinkers to the public.

Tuesday, May 24, 2005

China Set to Revalue Currency?


By keep their currency pegged to the dollar, and not allowing it to float freely, while inviting massive external investments and building up infrastructure in the most extreme, China has overtaken the US and many other countries in labor-intensive manufacturing concerns, such as textiles. Additionally, by constantly improving their technical and physical infrastructure, China's workers are exponentially more productive than they were 30 years ago. All the while, their currency is forced by their government to be undervalued -- so as to make investments in their country
much more attractive. Its quite a game -- if you can get away with it.

The problem lies now with the fact that US (and European) manufacturers are getting hammered when it comes to wage competition, versus the low-paid Chinese worker. As a result, the Chinese have grown their exports by leaps and bounds over the past decade, to the point that various trade restrictions, brought forward to limit international competition to the advantage of American manufacturers and to the detriment of American consumers, have
been imposed or are being pondered in American and European capitals

International pressure is beginning to mount on the Chinese government to revalue its currency to reflect the increased value of it. No doubt, currency traders would like to see the currency freely float, and be determined by subject market analysis, but for now, a slight... manual adjustment... might have to do, otherwise, there could be problems in the offing:

In its semi-annual currency report, the U.S. treasury warned China that it has six months, until the next currency report is due, to move to a more flexible exchange rate or be designated as a currency manipulating country.

Such a finding would trigger bilateral negotiations on the exchange rate and possible retaliatory action.

Ironically enough:

China has pegged the yuan at a fixed rate to the dollar since 1994, when it was beginning to emerge as a force in global trade. Left to free-market forces, specialists say that the value of the yuan would have climbed substantially against the dollar. But China and other Asian nations have kept the value constant by buying hundreds of billions of dollars in Treasury securities.

So let's get this straight.

China pegs their currency artifically low against the dollar in order to keep their prices competitive. US and European manufacturers have a great difficulty competing due to this. The undervalued currency leads to China's central bank accumulating large sums of American dollars in the form of US Treasury Bonds -- which we are using to finance a global war and a massive domestic welfare state.

Given that the US is pressuring China to revalue its currency, I can only assume that our leaders are not planning on borrowing significantly more money. Is this play on China's currency an indication by the Bush Administration that our free-spending ways may be coming to an end?

If we do not reign in our current deficit, and need to continue selling large mounts of debt to finance our government's adventures, is the Administration signaling higher interest rates down the road, as there will be less available capital in Asia to finance us?


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5:14 AM  

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