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Chinese Currency Appreciation Evidence Of Major Trend Unfolding

22 June 2010 4 Comments

Our fearless politicians here in America have a habit of pounding the table over “Chinese currency manipulation.”   While that term might make your eyes glaze over, I assure you that this is something to which you should actually pay attention.

The concensus in most developed countries is that a weak currency is good since it stimulates exports and brings money into the country.  The result then is a race to the bottom, where there is literally competitive devaluations.  In tandem with this course of action is the anti-Chinese rhetoric demanding that China allows their currency to appreciate.  Why?  Because if the Yuan appreciates, the dollar (and other currencies) depreciate against it.  Ok, there you have the basic high-level game plan.  Now, let’s get on to what this means for you and me.

A Larger Trend

The larger trend in play here, and which the currency situation has an impact, is standard of living.  There is a global imbalance in living standards, especially when comparing the United States and China.  The currency peg has helped to exacerbate this imbalance by creating a situation where dollars equaled more Yuan – or, where our dollars bought more Chinese goods than we should normally be able to afford.  Chinese leaders accomodated this policy because they enjoyed the export-driven growth.  I believe the U.S. consumer has peaked a few years ago, and while the consumer isn’t dead, it isn’t going to get back to the level of recent past.  China may realize this too…

As the Yuan appreciates, it possibly signals China’s shifting perspective to other industries versus the export industries.  Their export industries have been hurt badly by the collapse in global consumption from highs of the mid-2000’s.  As Americans turn toward more savings (although, still not as much as they should), the impact is felt in Chinese factories.

If the Yuan continues to appreciate, it means Americans will be able to afford less Chinese products.  Since much of what we buy is from China, it means affording less overall.  This is a big part of a re-balancing of the standard of living.

Peter Schiff comments on the situation:

if China were to stop manipulating the dollar higher, it would remove the props currently supporting our dysfunctional economy. American interest rates and consumer prices would soar, and our economy would collapse. Meanwhile, China would experience the opposite effect. Chinese consumer prices would fall, immediately raising living standards for average Chinese workers, whose higher real wages would finally allow them to fully enjoy the fruits of their labor.

After explaining how the appreciating Yuan will hurt the American economy in the above quote, he goes on to ask why our politicians would be so stupid to move towards such as situation:

Given this reality, why are our political leaders so adamant that China effectively pull the rug out from under our economy? Are they really that clueless? Perhaps they are – or perhaps they are a bit more devious. Perhaps they are using reverse psychology. Maybe they feel that the best way to get the Chinese to maintain the peg is to demand that they remove it. Historically, the Chinese have always resisted outside interference.

However, to paraphrase Abraham Lincoln, you cannot fool all of the Chinese all of the time. Soon they will see the light, and when they do, it’s lights out for American hegemony. If you think China is important today, just wait a few years. For example, while the Chinese automobile market is now the largest in the world, 90% of Chinese car buyers pay cash. In contrast, only 15% of American car buyers do so. In other words, Chinese consumers can actually afford their cars, while most Americans cannot. Without huge car payments, Chinese consumers are in much better shape not only to trade up to newer cars in the future, but to purchase other products as well. This suggests huge future growth, not only in automobiles but also in other consumer products as well.

Lastly, Schiff sums up the situation with the following:

Whenever the Chinese government decides to end the peg, the Chinese economy will benefit as a result. While as citizens we can hope that U.S. leaders respond with the right policies to enable our economy to regain its former glory, as investors we should position ourselves to benefit from the more certain outcome.

Bottom Line

I believe the trend is clear.  Both the Yuan and the Chinese standard of living will increase.  The dollar and the American standard of living will decrease.  It is a naturally imbalance that cannot be held back much further.

Make no mistake, this is a major event in the global economy.  Moreover, it’s still the early innings here in this game.  Unfortunately, the American economy and the American politician is not in the driver’s seat despite what most of us think.  The Chinese have the growing economy, the reserves, and the cheap labor.  More importantly, they have the hundreds of millions of workers who have spent years building fancy appliances, gadgets, and other things only to see them ship off to an American consumer; these same workers are now eyeing these items more and more for their own possession and consumption.  They want these things and are wondering why only the Americans can have them.  They want a higher standard of living.

4 Comments »

  • Carol said:

    Most important is only reach people have cars and most Chinese are not able to live in China due to rising all living things: food, fruit, oil…everything.

  • شات دلع said:

    To create a business that we have become larger, of course we need the funds can be obtained through bank loans. Therefore, I think there is nothing wrong if we think about these alternatives, but we must be ready with all the risks.
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