Is China Manipulating its Currency?
Research for Online Investors

by John Dalt

3/17/10

Some of our smartest (dumbest?) pols are taking a shot at China.  It seems the Chinese are their latest target for scorn.  130 U.S. lawmakers urged the U.S. Treasury to label the Chinese as “currency manipulators.”   The implicit wrong is that through manipulation of the value of their currency, they gain an advantage in world trade.  If the government keeps the value of the yuan cheaper than market forces would dictate, the country’s exports are cheaper against other ‘fair-valued’ currencies.

This cannot end well.  Have you walked into your local bank lately and started yelling that their interest rates are too high?  Let us face it, every nation manipulates the value of their currency.  The U.S.?  Guilty.  If not, please explain the Fed buying almost $2 trillion dollars in mortgage backed securities (MBS) and Treasury bonds in the last year.  Was it to keep interest rates low for home buyers and the U.S. government?  What would the dollar be worth today without the purchases?  Much more.  Interest rates would be higher which makes the currency worth more to investors.

Our government has ignored Chinese manipulation of their currency for over a decade.  We also ignore their industrial policy that dumps products on other countries below cost short term, to seek a long term advantage.  We do not move quickly enough to confront these violations of free trade.  By the time a complaint is filed and moves through the WTC the affected companies or industries are so weakened they are no longer a threat to the Chinese exporters.

China pegs the value of its currency (yuan) to the U.S. dollar at 6.83   This rate is artificially low, held down, in part, by the Chinese government buying U.S. dollar denominated debt.  By maintaining a cheap currency, the Chinese give their exports an advantage against other exporters.  Dollars, Euros, Swiss Francs, and Japanese Yen flow into China from the sale of their exports, they have to either spend this foreign currency on ‘expensive’ items back from those countries or save them.  So far, the Chinese have been saving the dollars, this allows them to maintain their currency at an artificially low rate.

Funny things are starting to happen in China.  Workers want higher wages.   The internet and television provide a glimpse of life in other countries.  The Chinese workers want a better life, like they see on TV.  Chinese people want better food, a nicer house, clothes, more free time away from work, and vacations.

Increasing wages mean higher costs, which translates into higher priced items for export.  When prices go up, exports decline because of competition which slows economic growth.

The U.S. and China can manipulate the value of their respective currencies for a period of time. China probably longer than the U.S., because of their Communist structure, but eventually they must spend some of the hard currency back into the economy.  As they spend the hard dollars rather than save them, inflation will climb.  This will drive wages higher as workers demand pay to make up for their loss in purchasing power.  If they continue to save the foreign currency and hold it off the market, the store shelves will be empty, just as they were in the Soviet Union.

Respected market watchers are warning that China is building a bubble at this time.  I do not know, but it behooves us to watch the developments.  I will report more on China tomorrow.  Watch your holdings with Chinese exposure.

The South China Mall, the largest Shopping Mall in the World...Empty
Seven million square feet designed for 2,350 stores opens with less than a dozen.

To the mailbag:
Stick to economics and away from biased political opinions and urging your subscribers to sabotage health insurance for 30 million people!!   What are the economic implications of pass or fail of the bill?  Not a paid up member and if you keep this up I never will be!  ---subscriber R.B.

John’s response: We would like to have you as a subscriber, but if you choose not to, I respect that, paid up or otherwise.  We offer our investment services for sale to make you money, not to make you feel comfortable with a politically correct advisory.  You ask, “What does health care have to do with economics?”  What does socialism, federalism, communism, and capitalism have to do with economics?   I thought a lot, but perhaps I am missing something.  Perhaps our system, and your investments, can survive a government that is destined to bankrupt us all.  I don't believe I would be doing my job, if I didn't make our readers aware of the pickpockets that are focusing on their wealth.  Of course, like you I am charitable.  I just prefer to make my contributions voluntarily rather than through the government, and pursue my life without interference from the government.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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