Finding a Voice
Sunday, July 24, 2005
China: no more divide by 4
China has a new currency policy. Formerly, the yuan (like the Canadian dollar) was valued according to the U.S. dollar, but now China has set a new standard for it's own valuation. The New York Times calls it "opaque."
To determine the new peg, the central bank will look at how a basket of foreign currencies moved the day before. But the central bank did not reveal which currencies it will track or their relative weightings within the basket. This policy gives enormous discretion to China's leaders to push the yuan up or down as they choose.
The only limit that the central bank put on its moves was a promise yesterday that the center of each day's trading range would not move more than 0.3 percent in either direction from the center of the previous day's range. But with 20 or so trading days in a month, that means China could in theory push its currency up by 6 percent a month - or push it down by the same amount.
Currency conversions used to be so easy in China: divide the price in yuan by 4 for Canadian comparison and by 5 for American comparison. Not so easy anymore. I wonder what will happen to the Taiwan dollar, which has until now matched the yuan in fluctuation.
Of course, people's first thoughts go to effects on prices in stores on this side of the Pacific Ocean:
For American consumers, China's new policy is unlikely to have much effect unless it is followed by much bigger currency moves in the months to come. Chinese exporters making everything from clothing to computers incur much of their costs in dollars, importing essentials like fuel, factory machinery and computer chips.
This will mean that the overall costs of good manufactured by Chinese producers will rise by considerably less than 2 percent, limiting their need to raise prices to American retailers. ... "Prices in our stores are not changing any time soon," Amy Wyatt, a Wal-Mart spokeswoman, said.
So, the consumer is "safe," but is this really any better for the Chinese? The NY Times writer speculates negatively,
If investors decide that China's secret currency policy will result in a stronger yuan, then they are likely to pour even more money into China - a step that could feed inflation in China and make many Chinese long for the days when China still paid more heed to Mr. Greenspan than Mr. Zhou.
In my mind, this will have broader effects than finances, economics being more complex than mere money. The currency conversion confusion will add to the world's perception of Chinese culture as inscrutable, which goes a long way to put China in a place of stronger power on the globe. By turning away from the dollar to currencies like the Euro, China could also shift its alliances in some way. I wonder where this will lead.
NOTE: if the NYTimes link (above) doesn't work, you probably need an e-subscription (free) to the paper.
To determine the new peg, the central bank will look at how a basket of foreign currencies moved the day before. But the central bank did not reveal which currencies it will track or their relative weightings within the basket. This policy gives enormous discretion to China's leaders to push the yuan up or down as they choose.
The only limit that the central bank put on its moves was a promise yesterday that the center of each day's trading range would not move more than 0.3 percent in either direction from the center of the previous day's range. But with 20 or so trading days in a month, that means China could in theory push its currency up by 6 percent a month - or push it down by the same amount.
Currency conversions used to be so easy in China: divide the price in yuan by 4 for Canadian comparison and by 5 for American comparison. Not so easy anymore. I wonder what will happen to the Taiwan dollar, which has until now matched the yuan in fluctuation.
Of course, people's first thoughts go to effects on prices in stores on this side of the Pacific Ocean:
For American consumers, China's new policy is unlikely to have much effect unless it is followed by much bigger currency moves in the months to come. Chinese exporters making everything from clothing to computers incur much of their costs in dollars, importing essentials like fuel, factory machinery and computer chips.
This will mean that the overall costs of good manufactured by Chinese producers will rise by considerably less than 2 percent, limiting their need to raise prices to American retailers. ... "Prices in our stores are not changing any time soon," Amy Wyatt, a Wal-Mart spokeswoman, said.
So, the consumer is "safe," but is this really any better for the Chinese? The NY Times writer speculates negatively,
If investors decide that China's secret currency policy will result in a stronger yuan, then they are likely to pour even more money into China - a step that could feed inflation in China and make many Chinese long for the days when China still paid more heed to Mr. Greenspan than Mr. Zhou.
In my mind, this will have broader effects than finances, economics being more complex than mere money. The currency conversion confusion will add to the world's perception of Chinese culture as inscrutable, which goes a long way to put China in a place of stronger power on the globe. By turning away from the dollar to currencies like the Euro, China could also shift its alliances in some way. I wonder where this will lead.
NOTE: if the NYTimes link (above) doesn't work, you probably need an e-subscription (free) to the paper.
posted by Colleen McCubbin at 9:36 PM
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