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What’s Going On With China’s Currency? I Dunno.

By Dan Harris on Posted in China Business

A few years ago, I promised to write about anything that generated at least five shows of interest from readers. There have been times I have regretted that promise, but none more so than now.  I have received five emails from readers asking for our views on the recent currency issues and I even received and rejected a post on that from one of my law firm’s summer associates.

I have a real problem writing about China’s recent currency moves because I am not an economist. I took a whole slew of economics courses in college, including all of the core courses for a major, but I fell one fluff course short. I love economics and I fashion myself as an armchair economist.

But, the impact of currency fluctuations is incredibly difficult to predict and there is absolutely no reason why anyone should listen to my views on that when there are so many people out there who study these sorts of things for a living.  And even they, when pushed, would admit it will be difficult to make predictions on most of the central issues relating to China’s currency.

The only thing I will say is what I have been saying about China’s economic policies as a whole since the very inception of this blog: China’s government is first and foremost concerned about maintaining the harmony of its people and its own legitimacy. It will not compromise those things any more than is absolutely necessary. This is true of its currency as well. China’s government is not going to do anything with the Renminbi/Yuan (RMB) it believes might impair harmony or its own standing. Plain and simple. What this will mean in the way of numbers, bands, impact, linkages, etc., I do not know.

If we assume the Yuan will strengthen over the next few months, how will that impact YOUR business?  

  • Justin Liu

    This post gives tantalizingly little information and I can understand why but, I say “I might be wrong” be damned and speculate to your heart’s content. Was the currency promise just a ploy to get the monkey off china’s back for the g20 or does it mean that China is genuinely worried about negative trade policy impacts? Given your correct emphasis “harmony above all” is a hostile international posture disruptive or helpful for internal security. (ie us vs them, or look how everyone admires us)?
    an eager reader from Toronto

  • outcast

    I think what’s really going on is currency appreciation is needed in order to help deal with inflation and rebalace the economy.

  • charles

    The Chinese government’s first and only real concern is retaining power. A harmonious society is incidental.
    As far as the RMB is concerned, the issue is whether the Chinese government will let the RMB appreciate to lessen imbalances in its economy despite the possibility of some short term economic pain.

  • Falen

    Strategic thinking is fundamental to any supposed “big move” by China. The merits of raising the currency value, whether it really helps China to “re-balance” economy or not, has long divorced itself from the decision itself. Whether the change itself is good for China or not is a wholly separate consideration; as there are often many ways to achieve one objective and China will specifically choose not to pursue the method demanded by the US, and then package the policy demanded as a product “for sale” to the US, under the following pattern:
    China steadfastly refuses such demand for one reason or another, letting the punditries do their work of elevating any minor squabbling into a major international issue. The posturing continues for as long as China is able to withstanding the pressure. The longer China drag its feet on the issue, the more China exhausts the US of its political energy and attention to make its next demand on other issues, like North Korea, Iran, Pakistan nuclear deal, human rights, dry wall, intellectual property, Taiwan, climate change… Finally, Beijing responds in a way to “appear” as if making a major concession and consequently exact a huge political price.
    Bottom line, Beijing sees these demands as just a bunch of nuisance to be dealt with.

  • http://adamdanielmezei.com Adam Daniel Mezei

    @Falen | I so dig your name! Did you know that actor Edward O’Brien shared your namesake (spelled, Fallon, ‘natch) from the famous 1949 noir (the year of our liberation!) classic starring Jimmy Cagney? The character Fallon was also a fan of similar “Sum of All Fears” zero-sum game analyses that you’re slinging here like Spidey’s web in Dan’s comments section. While your graphs read like a beaut, it sounds more to me like the stuff of the next US-China mega-co-production (not the revamped Karate Kid with Chan and Smith). A bit over-the-top for the following reasons, methinks:
    ** you’re presuming that a “June Incident” can recur in the modern era. Is it even conceivable that the Pee-Are-See would “get away” with another Wild West turkey shoot on the so-called Square of Heavenly Peace with not only the rest of the world watching on the CNN boob tube, but this time on YouTube and other Web two-oh channels as well. My opinion: it *can* theoretically happen, but this time Uncle Samuel and His Special Friends wouldn’t let Zhongnanhai get away with it again. China can’t afford to allow THAT to happen to disrupt the Holy Harmonious Rise.
    ** you’re also attributing Dr. Evil-like super-brainiac “lay-zer” powers to the Chinese thinkers-that-be and their so-called ability to influence global affairs at the expense of the G8. Are you seriously saying that China is this so-called omnipotent, even though it is indeed colossally influential with its ability to make fantastic plastic machines at humongous volumes for overweight Midwestern Americans and their European special friends? I’m not sure I’d agree with you if you said yes, friend.
    ** you think China can keep this many balls airborne while it juggles its various domestic and international commitments? That, sir/madam/Pat, would be attributing a tremendous genius-like ability that even Master Kang himself didn’t purportedly possess.
    I think we should do as Dan says: let the so-called experts deal with the so-called currency RMB fluctuation problem.
    The rest of us should just kick back and crack open a warm Shlitz and chomp on some peanuts (or other snacks) and just enjoy the Expo.

  • Jiang

    I wondering why nobody mentioned many years ago when Japanese yen appreciated sharply under US government pressure, its economy doomed into a 10 year recession. In Chinese economic sphere, the anti-appreciation school also cites this historic misery and fight vehemently against repeating this fate on China. Those saying that Chinese government view harmony as an incident rather than its goal know nothing about China and Chinese history. Harmonious society is at the focal point of the 5000 years survival of the Chinese race and it’s written all over in Confucian’s teaching.
    China can’t afford any sudden move on anything. Everything, no matter how good it sounds has to go through a gradual process. That’s in the blood of Chinese people; just look at the Taiqi they are practicing–it’s slow and smooth but effective in maintaining the balance of the body and soul. It’s totally eastern and it has survived 5000 years. Chinese people view the western things as candy–it’s tasty and it’s yummy, but eat more and fast you will die a horrible death.

  • outcast

    @Jiang
    No one has mentioned it because that wasn’t the root cause of Japan’s economic troubles. It’s biggest problem was in the 80′s Japan was a developed country, but it’s policies were still that of a devloping nation. It’s economy was fundementally rotten and overly regulated, and it desperately needed reforms to make things better. Those reforms never happened. Instead Japan tried the classic Kaynesian way of spending its way out. This wasn’t very effective because Japan already had all of the infrastructure it needed. That didn’t stop them, so they built bridges to no where, highways no one uses, stoplights in canals with no ships, amoung many other white elephants. The result? Japan now has one of the highest debt to GDP ratios of any country in the world, right behind Zimbabwe. The reason for this was its refusal to change to meet new realities (Japan completely missed the globalization wave that benefited China so much).
    A 19 year economic stagnation is the ultimate price they paid for holding on so dearly to their precious thousands years old culture. One common trait of Chinese people, they constantly obsess over history but never learn anything from it. Traditional Chinese culture (much of which was copied by Japan) to a country is like cyanide laced kool-aid, the more of it you drink, the faster you die.
    As for your gradual approach, while in some situations it is warranted, in other situations is can lead to total disaster. Gorbachev and the Qing dynasty tried the gradual approach, and what happened to them? They completely collapsed.

  • SV

    China is not going to do anything until the Schumer tariff bill actually passes. They think that because playing for time has worked every time for the last 10 years, it will work now as well. Bluffing works, until it doesn’t.

  • Juliet Pacewiz

    Dan youre being far too modest you know far far more than the majority of people out there about China online lets have far more of your opinion and commentary and guidelance on China economics, law, tax, M&A, labor law, unions, due diligence edcuation and politics youre the only source that makes any sense don’t talk yourself down.

  • Jiang

    @outcast
    At least, Chinese took what happened to Japan as a mirror and are very suspicious of the motive of the West push about the RMB appreciation.
    Russia collapsed because it used shock therapy not because of Gorbachev’s leadership. Well, in Qing’s case, China has always been cyclical in dynastic change; one dynasty is replaced by another when it doesn’t live up to its heavenly mandate. So far the gradual approach has worked for China and there is no reason to try a shock therapy that proved devastating to Russia. It’s still a good thing that people are pushing and prodding China to move, but China has to move at its own pace, whatever the price it has to pay. Good or bad, China is still the longest lasting civilization standing. It’s that way for a reason not an accident.

  • Jiang

    @SV
    It’s not bluffing, it’s the result of the balance of the internal forces. One side will prevail when there is an impetus tilting the balance to their end. Chinese government is a political machine, not a child play. Gradually, the outside impetus will weigh less and less as China grows more and more powerful. In that case, the balance of the internal forces will dominate the scene.

  • outcast

    “At least, Chinese took what happened to Japan as a mirror and are very suspicious of the motive of the West push about the RMB appreciation.”
    “the west” is not pushing for rmb appreciation, it’s the us. If you can’t tell the difference, then perhaps you should try learning more.
    And if you’re wondering, the reason the us is pushing for it is simple scapegoating. Nothing more. Despite what your government tells you, the world is not out to destroy china.
    “Russia collapsed because it used shock therapy not because of Gorbachev’s leadership”
    That was AFTER the Soviet Union collapsed due to its inability to reform. They did it because their economy was spiralling out of control. The reforms were often rushed and not well thought out because the russian communist party still held onto some amount of power over the collapse, and they used it to try and prevent any and all reforms despite the economic crisis. Please check your facts.
    “Good or bad, China is still the longest lasting civilization standing. It’s that way for a reason not an accident. ”
    Actually it was an accident. Except Mongolia there wasn’t a single strong civilization anywhere near it. That gave lots of room for growth.

  • Jiang

    @Outlast,
    Russia and other eastern European countries are too hasty in abandoning their control over the monopoly industries that resulted in the collapse of their economies while China delayed liberating its state controlled enterprises but allowed the liberation of the private sectors. The smart things the Chinese leaders did is to feel the stone when wading through the waters, moving slowly but in a controlled manner. RMB appreciation should also follow this route. It’s the same for democratization.
    ”
    The Challenge to the Russians
    The strategy that enabled China to make this progress was essentially the opposite of what failed in Eastern Europe and Russia. In the latter countries, the state abandoned its control over the monopoly industries. Output in the monopoly sector collapsed, monopolies raised their prices relative to prices in the competitive sector, and the latter sector was impoverished by the higher prices. But in China the government used its direct control to maintain or increase output in the monopoly sector and its control over prices to encourage the development of the competitive sector. It is clear from the laws of development of the dual economy that only a reform of the Chinese type can succeed in Russia. No matter how long an “East European” reform is given to work itself out, there will be nothing but disaster. There is no known administrative mechanism that can possibly create the complex network of non-monopoly enterprises necessary to supply consumers in a modern society. The state must take the lead, but it must use the market mechanism to develop the consumption goods industry at all levels, from production to retail distribution.
    ”
    from
    http://findarticles.com/p/articles/mi_m1132/is_n1_v46/ai_15461197/pg_5/?tag=content;col1

  • outcast

    “Russia and other eastern European countries are too hasty in abandoning their control over the monopoly industries that resulted in the collapse of their economies while China delayed liberating its state controlled enterprises but allowed the liberation of the private sectors. The smart things the Chinese leaders did is to feel the stone when wading through the waters, moving slowly but in a controlled manner. RMB appreciation should also follow this route. It’s the same for democratization. ”
    You’re also comparing an apple and an orange. The Soviet economy in the 80′s was already fully industrialized, while China was still a farming country. This difference does matter because there isn’t nearly as much room for growth in that kind of environment, and also the state owned enterprises were far, far bigger and more complex. Therefore the rot was set much deeper, and allowed the Soviet leadership much less time to “feel the stones”. It’s also worth mentioning that the Soviet economy was literally almost bankrupt, there was no money in the treasury and the multitude of inefficient state owned enterprises were bleeding them to death. Lets also not forget about rampant shortages of daily consumer goods like food. Everyday to go to the market people would need to have their grandparents stand in line for 5 or 6 hours a day just to buy food for the next day. Can you imagine that? They tried to feel the stones with perestroika, but it didn’t go far enough because the rot was simply too deep. However, what made things worse was the russian communist party itself, which refused to give up orthodox marxism even after the ussr collapsed, causing them to try their best to sabotage and disrupt desperately needed reforms during the early years of Yeltsin’s presidency.
    “Reform was largely focused on industry and on cooperatives, and a limited role was given to the development of foreign investment and international trade. Factory managers were expected to meet state demands for goods, but to find their own funding. Perestroika reforms went far enough to create new bottlenecks in the Soviet economy, but arguably did not go far enough to effectively streamline it.”
    http://en.wikipedia.org/wiki/Peristroika
    Had they “felt the stones” in the 70′s, it might have actually succeeded, but they didn’t because the USSR’s communist party was an ideological fantasy land, only orthodox marxism was allowed and no one was allowed to talk about anything else. Peristroika in the 80′s was a classic example of “too little, too late”.
    It’s also worth mentioning that the economy of Poland and other Soviet puppet states was even worse. In Poland, not only were they bankrupt but they also were literally starting to descend into starvation. Starvation! If your people were starting to go hungry, what would you do? Let them continue to starve or institute the radical reforms needed to solve the problem?
    And by the way, in places like Poland where the communists were almost completely removed from power after the elections, the reforms went much more smoothly, and so even though they had a short period of pain in the early to mid 1990′s (which was around the time your article was written) their economies recovered and are now growing very well (or at least it was before the financial crisis).

  • robertb

    Look at the balance sheets. The biggest loser in currency revaluation will be the People’s Bank of China. All those dollar assets they hold will drop in value relative to the liabilites they hold denominated in RMB (all those RMB they’ve exchanged for the USD that local banks surrendered to them on trade accounts).
    The de-facto USD exchange rate peg and the new bank lending stimulus are central-government subsidies to Chinese businesses.

  • Currency

    Dan,
    You are smart to stay out of this fray as most of the so-called experts in this have consistently been proven wrong.

  • Peter Fernandes

    I’m new here and would like to read more about the valuation of China’s currency. Just my request.