How big of a deal is this:
The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday.
While there remains a possibility of a last-minute glitch that could delay the announcement, China’s central bank appears to have prevailed with its arguments within the Chinese leadership for a stronger but more flexible currency, these people said. They insisted on anonymity because of the sensitivity of the issue in Beijing.
The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.
I understand this will have an impact on our exports and imports, but how much of a deal is this? Does this bode well for our economic recovery in the long term?
I’ll check with Krugman and get right back to ya with that.
Only to the extent to which they follow through – I have a feeling that “flexibility” won’t mean the same thing to them as it would to us.
It appears that they now know everyone’s pissed off about their currency manipulation and are trying to unwind that without killing their economy.
China is able to sell us millions and millions of cheap goods because their currency has been artificially weak as compared to the dollar. Letting the renminbi float on the open market even a little bit probably means that those will slow down due to a repegging of the price of China’s exports.
It’s a short-run boost for us, since it makes our exports relatively cheaper right now. It’s also (arguably) a good thing in the longer run for the Chinese and for us since it reduces the size of the ocean of Chinese cash that a lot of people think was the underlying fuel for the Wall St. speculations of the last few years. But we shall see.
Should help. But if you follow “Calculated Risk,” you’ll see that the housing market is headed for still more trouble later this year. I fear that could drag down the apparent beginnings of a jobs recovery.
If the numbers have been consistently moving in the right direction at the time of the mid-term elections (even if only very gradually), I think we’ll do OK. If they start backsliding we’ll get hammered, no matter how crazy the opposition.
Fallows has been following this issue for quite some time. I highly recommend visiting his archives for intelligent, informed analysis.
i’m not sure this augurs well for us.
Argh, currency policy makes my head hurt. But if I remember college econ at all, I believe that this should help the U.S. at least a small amount as it will make our exports more likely to increase. And it’s a sign that China may be finally realizing that its currency manipulation is not a good thing for them in the long run.
And that’s about all the “analysis” I can manage on a subject I haven’t even tried to understand since about 1981.
Considering the Yuan is undervalued by anywhere from 20-50%, a 2-5% move is bubkis.
Until the Chinese (and the Germans for that matter) stop acting like mercantilists, we are still screwed.
China’s currency appreciates, they’ll have more purchasing power of US goods. Maybe we can start manufacturing and exporting durable goods again. Of course this can only be interpreted that Obama’s visit to China was a failure. /Teabag-Firebag Axis.
Translation — If we’re caught commenting on record about this, we’d be executed by Saturday morning.
I’ll forward along Sarah Palin’s White Paper on China’s currency policy as it relates to our debt obligations as soon as it’s posted to Facebook.
@Noonan: I was thinking the same thing: someone needs to ask Sarah Palin exactly what Cole’s asking, and see if she has even the slightest idea what the fuck it’s all about. I’d bet my car she doesnt.
Read Fallows on this. He is my go-to-guy on all things China.
I see @Herr Blindschtiller: got there first.
@Punchy: But she can see Chinatown, from her house. Also, too.
As others have mentioned, Fallows (our “Man in China,” I guess,, even if he is, in fact, no longer in China) has had some pretty good blog posts about th’ RMB. Some recent posts about it here, and here.
I hope he gives us a fuller write-up soon (I think he’s working on a longer-form piece for the Atlantic).
I disagree with people saying that this move by China will help US exports. The dollar would need to fall against all currencies in order to give the export sector a significant boost. (A broad fall in the dollar did happen prior to the 2008 recession, when the dollar strengthened due to flight-to-safety. Data here.)
However, a shift in the dollar/yuan rate will slow down the flood of imports from China. That will ease the pressure on manufacturing jobs here in the US, which have been decimated during this recession. (Durable and non-durable employment numbers.)
Brick Oven Bill
Sun Tzu was Chinese. The Chinese finance ministry guys laughed out loud on TV at Tim when Tim told them that the US was committed to a strong currency.
What we see is China setting in place a mechanism to counter, as best they can, the hyper-inflation scenario in the US. As we know, our loving financial masters from the investment banks have, for years, enriched themselves by putting in place a mechanism to utilize what amounts to slave labor by elimination the historic 30-40% tariffs, which are now down to around zero.
They are loosing their grip.
So, what happens now is this: Chinese stop buying debt > government prints money > inflation > government benefits indexed to inflation > government prints more money > more inflation > uncontrollable currency feedback loop > barter for those who produce things of value > the failure of the modern Western model of democracy, which has little resemblance to what was given to us in 1789.
What we have coming out of the ashes is, hopefully, an originalist Constitution model, where those Citizens actively participating in the economy elect representatives to lead the nation through very challenging times.
China, by the way, is screwed.
@PeakVT: Durable and non-durable employment numbers.
Fuck me, I was about to say the same thing.
If they do this, it won’t just be to be nice to us. They’ll do it at a time and in a manner of their choosing, calculated for their own benefit. The question is whether it’s particularly calculated to disadvantage us as well. Projecting the timing of the effects of such a move by China might give a good timing hint of when to short the U.S. economy if you feel suspicious of this. I’m not smart enough for that sort of thing, though.
@Brick Oven Bill:
Funny how the originalist view exclude a substantial portion of active participants in the economy. Here’s a hint: everybody who doesn’t live off the land without selling their goods and services is an active participant in the economy.
“Skins in the game” is the one of the stupidist memes out of the right, and that’s saying something. STFU with it already. We are not a constitutional oligarchy, and if you’re afraid of s o c i a l i s m, that won’t be a good way to fend it off. Quite the contrary.
As Dean Baker regularly puts it, if the US does not manipulate its currency down versus the renminbi, it is because we don’t want to, not because we cannot.
It is asking China to do our finance minister’s job.
By the way, Greenspan is confident that we won’t have a double-dip recession:
If that doesn’t scare you, I don’t know what will.
I’m so glad BoB’s grasp of finance is just about as good as his grasp on Eastern (and Western) philosophers…
@catclub: but that just leads to a vicious cycle.
Brick Oven Bill
To add insult to injury, Barry’s handlers do not just print and spend money BenA. Barry’s handlers print the money and give it to themselves for free, and then loan it to another set of Barry’s handlers at 3% interest.
Pretty good work, if you can get it.
It should be beneficial for jobs, both here and elsewhere in the world. Obviously, the details might prove less felicitous, but if the quote is correct, then it should be a good thing – it’ll help lower our debt load, and make us a little more competitive in the exports market.
@Brick Oven Bill:
Really? I could have sworn he was Swedish.
Maybe, maybe not. From Ray C. Fair’s paper for the Cowles Foundation (via Fallows, naturally):
It’s all a little (or a lot, actually) over my head, tho’, so I’m just taking their word for it.
There is no longterm economic recovery in the U.S. What we have now – 10% unemployment, 25% of mortgage owners at least one payment behind, pay freezes, 16%+ spike in annual health insurance premiums, furloughs, $3+/gallon gas, WalMart the leading private sector employer, etc. – is as good as its going to get for at least a generation.
But I’m sure the WH has scheduled another job “listening tour” in a month or so to address this problem. Maybe Timmy Geithner will join the Prez this time on the road.
Yeah, that’ll work.
Brick Oven Bill
No, he was Chinese JGabriel. You are thinking of Mozart.
J.A.F. Rusty Shackleford
For five years after college I worked with the developmentally disabled population and use to hear some hysterical stuff but I’m not sure if I ever worked with anyone as crazy as BoB. The first sentence is classic Bob: “Sun Tzu was Chinese. The Chinese finance ministry guys laughed out loud on TV at Tim when Tim told them that the US was committed to a strong currency.”
Besides being Chinese, what does Sun Tzu have to do with anything else BoB wrote. He could have easily began with “The Great Wall is in China. The Chinese finance ministry…” And when did Balloon Juice’s Tim ever have direct talks with the Chinese finance ministry to communicate the U.S. commitment to a strong currency?
Then BoB goes into what seems like an argument for an increase in unionization of the U.S. workforce with “…our loving financial masters from the investment banks have, for years, enriched themselves by putting in place a mechanism to utilize what amounts to slave labor.”
This completely blows my mind: “What we have coming out of the ashes is, hopefully, an originalist Constitution model, where those Citizens actively participating in the economy elect representatives to lead the nation through very challenging times.
China, by the way, is screwed.”
Can anyone tell me what the fuck that means? What constitutes “actively participating in the economy”? Is it enough to buy groceries to qualify? Is there some threshold that determines active participation? Is someone that gets most of their income through capital gains actively or passively participating in the economy? And how would this screw China? I assume that BoB considers the Tea Baggers as active participants. If that is accurate, then wouldn’t the Tea Baggers continue to actively participate in the economy by shopping for cheap Chinese junk at Wal-Mart?
BoB reminds me of the Damon Wayans character that used to use very big words in a stream of nonsense. I’ve encountered crazy people on the bus that are more coherent than Balloon Juice’s favorite bigot.
J.A.F. Rusty Shackleford
@Brick Oven Bill:
He was being sarcastic, you doofus.
Brick Oven Bill
Twelve percent of the population voted in 1789 J.A.F. Rusty Shackleford. These were men who held responsible jobs, or owned property.
Mozart wasn’t Swedish either.
see, thats a problem on the net – I was wondering if BoB was sarcastic or just insanely rambling. Sadly it is not hard to find either in comments and sometimes the subtle differences are not intuitively obvious to the casual observer.
J.A.F. Rusty Shackleford
@Brick Oven Bill:
So, active participant in the economy means white landowners, what a surprise.
B-O-B means “Borish Obnoxious Bigot”
It’s good for me, because I’ve been making the effort to invest in China. So I should get a bit of a (temporary?) bounce.
I saw on one of the econ blogs I read that, given Chinese demand for oil is going up, an appreciation of the RMB may bump gas prices up higher. That would be a bad thing for us, actually. It would certainly mitigate any good that comes from the trade balance/employment effects it will have in the US.
What can I tell you? I know just enough to be dangerous.
Brick Oven Bill
We are a far more ethical group than a handful of investment bankers, ‘Jennifer Aniston Fanclub’.
Like the motto of Transylvania Polygnostic University says, “Know Enough to be Afraid.”
Local Chinese business groups want Chinese consumers to have increased purchasing power. Allowing the currency to float a little is basically tossing them a bone.
The macroeconomic effects of this will probably prove to be very small here in the US. This matters more as a signal. China is roughly in the same position in today’s Great Recession as the USA was in the Great Depression. There’s been a lot of speculation in the econ/finance and China watch blogosphere regarding whether the Chinese govt. would take measures similar to Smoot-Hawley to protect jobs at home, with currency manipulation (rather than tariff barriers) being the means most readily at hand for doing that today. This rather modest change in policy is a signal – equivalent to if the US Congress had repealed most of the provisions of Smoot-Hawley in 1931 or early 1932.
And contra BoB above, it is a positive signal from the Chinese govt. to the US govt., one which is probably a cooperative response to the low-key way that Obama’s visit to China was handled and the noises that Obama and his team have been making about being serious regarding future reductions in the US budget deficit. This is a tit-for-tat iterated prisoner’s dilemma game being played where both players cooperate. Funny how it works that way when adults are in charge.
@jeffreyw: You are the man! My first thought was –why didn’t he email Krugman or Delong –people who actually know something?
Maybe because of those embarrassing incidents where he called Krugman names?
Indeed the benefits in the US, from my understanding, will be small and mostly political. However, this move will be very good for the rest of the developing world.
@Brick Oven Bill: Are you under the illusion that just saying things makes them true? Is this based upon your theory of Blowhard Original Solipsism?
Third Eye Open
So BOB, how do you explain that Sun Tzu was Chinese, considering the fact that “China” did not exist during his time. In fact a large, fractured set of kings and clans fought for control of a large portion of the landmass now known as China. Seeing as Tzu was from Qi, and the vast majority of the population in the country known as China, today, is actually Han, it is empirically proven that your Crouching-Troll is very weak. Now stop touching yourself on company time, you’re going to go blind…
Many economists believe the renmibi is undervalued by around 40 percent. I’m assuming China’s revaluation will be at most 5 percent, and more likely 2-3 percent. That’s really just a drop in the bucket and means they continue to game us. Meanwhile, the US will say this is great progress and we’ll back off for a few more years and the Chinese will have stalled us/beat us once again.
The Moar You Know
It’s not going to change anything, because the Chinese are not going to change a system that has benefited them at the expense of everyone else, unless they are forced to.
They are not being forced to, you may notice.
Classic move from them. Announce a small change in the way they do business, and then fail to do it. Westerners keep falling for it. I find it amazing.
BOB – in 1789, Andrew Jackson could author the Federalist Papers in the friggin newspaper and people understood what he meant, today the teabaggers would stare at the book and claim he was ‘litist for using big words. Palin would make fun of his clothes and claim he wasn’t a real Merikan (even though he was aide-de-Camp to GW) and Murdoch (definition of an outside agitator) would hit him with a BS propaganda campaign complaining about the burden of taxation… But never mind, go back to your little fantasy that life was so much better in 1789 – just don’t let the polio, debtor prisons and malaria hit you on your way out. PS even then, Jackson understood the need for a strong federal government so the new nation would not be taken over by foreign entities (something your party as evidenced from the 5 so called Supreme Court Justices doesn’t care about)… PPS: active participant in the economy means everyone these days since our economy is based on suppliers, builders, growers and consumers. I AM SO SICK OF THE RIGHT WING BS – IT IS ALL JUST CRAP
Tres. Sec. Geithner has been talking about this for a long time.
This announcement comes just as Mr. Geithner arrives in Bejing.
I am sick of the ones who call him a criminal. They are the same ones who state how Obama has failed them today.
The Chinese floating their currency really messes with Wal-Mart’s business model. Beyond that, I don’t have a clue other than that a rallying cry will arise from Teh Heartland(tm) and it will go something like this: “Okay, now who’s going to build my cheap shit?”
Does this mean that the “apology tour” has actually borne fruit?
@44 and @45 brush against the issue. John’s asking the wrong question. Instead, “Why are the Chinese agreeing to this?”
In part, yes, it’s because nations (and particularly ours) are becoming annoyed at the effective trade imbalance caused by the unbalanced currencies. But that’s not (I think) the big reason.
The big reason is because China’s changing its game.
It’s built a lot of infrastructure, paying for it with exports. However, to leverage that development it needs to build its consumer base. To build that base, its manufacturers need to sell internal more and export less.
Changing the currency balance forces this more effectively than any other force. Using a bad analogy, other means would be forcing water to flow uphill, while this simply ‘raises the pond’ so downhill is now thataway.
The effect on us is, in their view, significantly less important.
We’ll purchase fewer goods from China. We’ll either purchase them from someone else — someone more expensive than China was. That someone MIGHT be ourselves — will be ourselves for some goods.
Other nations will do the same, because we are/were not China’s only customer. Those nations will seek the new ‘best price’, and in a few cases that will be the US.
But it’s not going to make a huge difference in our import/export balance. It’s not going to turn us into an exporting nation again. It’s just going to be a nudge.
@Brick Oven Bill:
‘Originalist constitution’ and ‘Citizens actively participating in the economy elect representatives’ meaning voting rights tied to ownership (levels to be defined)?
Do your wet dreams also include the requirement of having to demonstrate lineage back to the passenger list of the Mayflower, the reintroduction of remuneration-free employment relationships for pigmentally-overloaded persons and noodling Sarah Palin?
I just like how the rotating tagline I got upon opening this page was : “This is a big f—–g deal.”
Agreeing with what ThatLeftTurninABQ said, this matters more as a signal for what might come from China. Hopefully they’ll follow through and allow a small appreciation of the RMB against the USD. It’ll help ease the inflationary pressures on their people and it’ll give us a modest boost to our export sector (which is important considering our economic state, where every little bit stands to help).
I think in the longer run, it signals that China might be getting to the point where they’re going to be willing to allow a more level playing field for international trade. It’ll help ease the wild swings of the economy we’ve had over the last decade due to artificially cheap dollars. Lastly, and this is a long-shot hope, I’m hoping that it might lead to a diversification of the source of US imports. The knife that China’s been able to hold over us for the last decade due their increasingly large holdings of US securities was getting worrisome.
@ksmiami: In 1789, Andrew Jackson was a country lawyer in Tennessee. Hamilton, Madison, and Jay wrote the Federalist Papers.
My mistake, I mea nt Alex Hamilton… I always switch those two in my brain
One was a bankster who got shot in a duel, and the other was a duelist who went looking for banksters to shoot. Remember that phrase, sort them alphabetically by last name, and you’re all good.
@ksmiami: It IS all just crap. It’s not the only crap out there –but it does deliver a reliably “crap-icious” product.
@Noonan: She could see China when she gave that speech in Hong Kong, of course. The woman never stops adding to her areas of expertise.
If someone asks Sarah Palin about the renminbi, she’ll answer that she prefers General Tso’s chicken or beef chow mein.
@Kirk Spencer: Sounds about right. I think this would have been a much bigger deal if it had happened 10-15 years ago, before we pawned off half our industrial sector to them.
Michael E Sullivan
this won’t make a big difference. One thing to remember is that while a misvalued RMB is bad for world economic stability in general, it does not involve direct costs to the US. In fact, China’s current currency policy effectively amounts to giving the US (as a whole) interest free loans as long as we take the money in the form of imported chinese products.
Now the negative aspects of this (job losses in export industries) tend to bite harder by being more concentrated than the positive aspects (generally lower prices on goods that could be imported from China). But overall, this is actually a pretty good deal for the US, and a bad one for China, so the idea that we are dependent on them to fix the problem to somehow help us is kinda bass-ackwards economically.
China revaluing it’s currency in general would be expected to cost our economy more than it benefits us
That said, right now, it will work out nicely because the cost will come in the form of slightly higher inflation, which our economy actually *needs*, even though our current monetary authorities are too busy fighting the last “war” (of ’75-84) to allow it. Claims that you can’t lower interest rates below zero are silly, because the Fed has many other options at it’s disposal if it were serious about establishing a solid bump in the expected forward inflation rate.
To paraphrase something Yglesias (I think) said a couple months ago: I’m not a world economic expert or anything, but if you put me in charge of the Fed and the Treasury and gave me a mandate to lower the value of the dollar vis-a-vis other currencies, I’m pretty sure I could make that happen. Someone quoted Dean Baker as saying that we are basically asking China to do something that our own monetary authority could perfectly well do. I think this is exactly correct.
Oh to answer the original question, it may make a difference in export growth but it won’t be a big one.