Stronger Chinese currency is good … and bad

April 8, 2010

This is from the New York Times is important (as outlined by me):

1) A stronger renminbi could prove a mixed blessing for the United States. If China cuts back sharply on purchases of Treasuries, then the Obama administration could find it harder to finance American budget deficits.

2) But with the Chinese economy booming, a small move in the renminbi may still leave the central bank struggling with trade surpluses and a tide of speculative investment into China. That could force it to continue buying Treasuries with the extra dollars.

3) A slightly stronger renminbi that fluctuates each day against the dollar will mainly hurt low-margin, labor-intensive industries in China like shoes and textiles, they said. Many Beijing officials have been worried about job losses in these industries if the currency appreciates. Much of this production is already starting to move out of China, notably to Vietnam and Bangladesh, where labor costs have stayed low. And Chinese factories producing these goods have been struggling to find enough workers in the last two months as the economy grew powerfully this winter, stoked by heavy bank lending, strong demand for workers in the retail sector and rising government spending on high-speed rail lines and other infrastructure investments.

4) More high-tech industries, like the production of computers, have tended to favor a stronger renminbi. Further migration of labor-intensive industries to other countries could free up more workers for high-tech work, making it it cheaper for these industries to import materials that are priced in dollars. Such a development would create more Chinese competition for high-tech operations in America, however.

Me: I certainly don’t think the Obama administration views this is a silver bullet for the U.S. economy or the elevated levels of unemployment. More like it might help at the margins. The real benefit of appreciation is avoiding a highly destructive trade war.

3 comments

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If Obama wants to sell Treasuries, then raise rates. Basic Supply and Demand Economics. Why would anyone buy them at these rates. Do they really think we are all idiots?

Posted by minipaws | Report as abusive

Minipaws, I think that when people casually claim that global financial markets are easily understood by anyone who’s drawn an Econ 101 graph with intersecting lines, it gives those around them more than ample cause to view them as idiots.

Higher rates mean higher deficits from servicing the debt. You’re basically saying, why not take cash advances from payday lenders to pay your credit card bills?

Posted by JamieSamans | Report as abusive

@ both Minipaws and JAmieSamans

The global financial markets are systematically and fundamentally flawed to begin with.

It was structural inefficiencies with the system is itself means that everything we learned in Econ 101 or even with Econ PhD’s couldn’t have forecasted the crisis.

The rules do not apply in a Greed motivated world.

Posted by Phead128 | Report as abusive