China makes bold move
Atul Chatterjee
April 28, 2009
The US Treasury refused to declare China as a currency manipulator even though many US manufacturers wanted it labeled as such. They have claimed that the Chinese yuan is grossly undervalued making it easy for China to export to the US at low prices. China runs a trade surplus against the US.
However another move may have indirectly depreciated the dollar against the yuan in other words made the yuan more expensive - appreciated or upvalued it. The US government has gone if for a massive spending spree to bailout companies and put money into the hand of state governments to increase social and infrastructure spending. This to bootstrap the economy out of the recession.
This increase in spending has been met by printing currency notes, which may cause a rise in prices and a fall in the purchasing power of the dollar. The value of the yuan will rise relative to the dollar, which is what domestic producers in the US want.
In a separate development the Chinese announced that the Special Drawing Rights (SDR) issued by the IMF should be treated as a reserve currency. The dollar has acted as the reserve currency since 1969. So any country with excess foreign exchange holdings puts it into dollar securities issued by the US government. In other words the US gets cheap capital without even having to bid for it.The interest that these securities pay is low.
The other option is a currency swap, simplistically put it is a currency deposit that China has arranged with Argentina, Belarus and others. China has put some of its excess reserves into those countries and uses it to finance imports or earn a better rate of interest. Belarusīs gain is the USīs loss.
A decade ago the idea of swapping currencies was floated in the Asian Development Bank but the IMF dominated by the US quickly sank the idea. Further the other countries in the move were not all for it, scared of the US and EU. Now with the recession and the West in relative disarray China appears to have decided to go for it alone.
In addition as a hedge China is putting in $40 billion into the IMF and it remains to be seen how this and subsequent contributions if any will increase its voting power. The IMF is due to re-examine its voting powers in 2011. One of the principal determinants of voting rights is the contribution made by member countries.
China which has not asked for G-8 membership is now starting on a new tack to ask for changes in the world economic system notably parking reserves. After all it is seen as the engine of recovery in this time of recession. Now lets wait and see who makes the next move.
However another move may have indirectly depreciated the dollar against the yuan in other words made the yuan more expensive - appreciated or upvalued it. The US government has gone if for a massive spending spree to bailout companies and put money into the hand of state governments to increase social and infrastructure spending. This to bootstrap the economy out of the recession.
This increase in spending has been met by printing currency notes, which may cause a rise in prices and a fall in the purchasing power of the dollar. The value of the yuan will rise relative to the dollar, which is what domestic producers in the US want.
In a separate development the Chinese announced that the Special Drawing Rights (SDR) issued by the IMF should be treated as a reserve currency. The dollar has acted as the reserve currency since 1969. So any country with excess foreign exchange holdings puts it into dollar securities issued by the US government. In other words the US gets cheap capital without even having to bid for it.The interest that these securities pay is low.
The other option is a currency swap, simplistically put it is a currency deposit that China has arranged with Argentina, Belarus and others. China has put some of its excess reserves into those countries and uses it to finance imports or earn a better rate of interest. Belarusīs gain is the USīs loss.
A decade ago the idea of swapping currencies was floated in the Asian Development Bank but the IMF dominated by the US quickly sank the idea. Further the other countries in the move were not all for it, scared of the US and EU. Now with the recession and the West in relative disarray China appears to have decided to go for it alone.
In addition as a hedge China is putting in $40 billion into the IMF and it remains to be seen how this and subsequent contributions if any will increase its voting power. The IMF is due to re-examine its voting powers in 2011. One of the principal determinants of voting rights is the contribution made by member countries.
China which has not asked for G-8 membership is now starting on a new tack to ask for changes in the world economic system notably parking reserves. After all it is seen as the engine of recovery in this time of recession. Now lets wait and see who makes the next move.
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