Projections on this float are that the Chinese currency will FALL against the dollar. This will make oil cheaper for them, increasing their demand for that commodity.
More wobble than float
Jun 20th 2010, 17:23 by The Economist online | HONG KONG
ON JUNE 19th the People’s Bank of China (PBOC), the country’s central bank, said it would increase the “flexibility” of China’s currency, thus interrupting the weekends of analysts, policymakers and journalists, who have been watching and waiting for this decision for months. As a small mercy to foreigners, the PBOC posted an English version of its announcement on its website. But that didn’t make its precise intentions much clearer. What, one wonders, does the PBOC mean by its pledge to keep the “RMB exchange rate basically stable at an adaptive and equilibrium level”?
The statement was “vague and limited”, according to Charles Schumer, a Democratic senator from New York who is sponsoring a bill to slap duties on Chinese imports. It was followed by another statement on June 20th (in Chinese only) reassuring everyone that basic stability would be safeguarded.
The PBOC was clearer about what it intends not to do. It pointed out that China’s controversial current-account surplus has narrowed over recent years, from 11% of GDP in 2007 to 6.1% of GDP last year. There was therefore no justification for a “large-scale appreciation” of the exchange rate, it said. Most likely, the central bank will first allow the yuan to wobble by up to 0.5% each day. When it is confident that China’s economic momentum can survive the euro-area’s woes, it will let the yuan strengthen at about the same pace as before the crisis, ie about 5% a year, on a trade-weighted, inflation-adjusted basis.
The PBOC said it will be guided by a “basket” of currencies, not the dollar alone. If the euro resumes its slide in the next few weeks or months, the yuan might even be nudged down a bit against the dollar, to keep its trade-weighted value stable. America’s Congressmen, don’t much care for nice debates about the equilibrium, trade-weighted value of a currency. They do care about how many yuan you can buy for a dollar. Tao Wang of UBS has ventured an answer to that question. She forecasts that by the end of 2011, you will be able to get 6.2 yuan for the dollar, compared with 6.83 now.
That in itself is not a momentous change. But it is best to see this weekend’s move as an ins utional reform, rather than a change in price. It was a slow, deliberate step towards a more sophisticated currency regime, rather than a stronger currency per se. As China’s economy evolves over the next few years, weaning itself off investment spending and towards consumption, it now has a suppler exchange rate that can help guide and cushion that process. Presumably that is what the PBOC meant by an “adaptive” currency.
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Europe's financial crisis makes Chines goods cheaper in the US.
Wrap yer brain around THAT.
Last edited by RandomGuy; 06-21-2010 at 01:11 PM.
Doesn't it seem like it is in China's best long-term interest to do just what they are doing, i.e., allowing their currency to fluctuate relative to other world currencies in a way that keeps the world economies afloat?
China would have no real incentive to watch everybody else go down the drain, because doing so would drag them down as well.
Who will the Chinese sell to if everybody goes under?
Very salient point, and one the Chinese are acutely aware of.
This is one of the reasons they are trying to get their own internal markets working, as opposed to being driven purely by exports.
Yeah, but the wong way. At least in our interest. The thing about China is this. There's the old saying, you owe someone...a bank for example...a little money...they own you. You owe them a LOT of money, you own them. Tough to say who holds the cards here.
Too bad our politicians don't look out for the best interests of our economy. They prefer to it up for power.
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