Copyright 2008 The Financial TimesWrong answer. Renminbi literally means "people's currency." Until July 2005 the renminbi, issued by the People's Bank of China, was worth about 12 cents American. This was a favorable exchange rate for the Chinese, who have been exporting like crazy to the rest of the world and have amassed a trade surplus with the U.S. that now exceeds a quarter of a trillion dollars annually, not exactly lunch money.
Since 2005 the renminbi has been allowed to float (slowly) against the dollar and has appreciated over 20% in three years (see graph). As far as the Bush Administration is concerned, that trend is our friend because it prices American-made goods more competitively. Chinese authorities, on the other hand, are not wild about it, and this week they seem to be signalling that they have had enough. On Monday the renminbi dropped out of a narrow trading band and fell by 0.73 per cent.
So most Americans are thinking, "Who cares? I don't like stir-fry anyway." They should care. Dubya cares. He's got his Treasury Secretary, Henry Paulson, over in Beijing right now trying to sweet-talk the Chinese into sticking with the "reform process." Truth be told, China is experiencing an economic slowdown just like everyone else, and displaced workers are rioting in the south. Government officials would like to keep the lid on, and a weakening currency is one way to do it.
If speculators (remember them?) smell blood in the water, things could quickly get out of control. A rapid devaluation of the renminbi is in no country's best interests. Among the domino consequences would be devaluations of other Asian currencies as well as protectionist measures in the West. To defend its currency, China would have to start dumping U.S. Treasuries, driving up interest rates and exacerbating our own recession. And if we can no longer borrow from the Chinese, how are we gonna pay for all these bailouts at home?
Let's face it, the Chinese are now calling the shots. They are choking on U.S. debt and do not want the U.S. trying to inflate its way out of the current credit crisis. Zhou Xiaochuan, the Governor of the People's Bank of China, lectured Paulson earlier today. “Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” Zhou said. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.” Translation: Don't expect us to clean up your mess. No sooner were the words out of his mouth than Zhou hopped on a plane to Washington, D.C., for a Group of Thirty (G-30) meeting, at which incoming Treasury Secretary Timothy Geithner will surely hear the same message.
My fellow Americans, get ready for a lower standard of living in the coming years.
Since 2005 the renminbi has been allowed to float (slowly) against the dollar and has appreciated over 20% in three years (see graph). As far as the Bush Administration is concerned, that trend is our friend because it prices American-made goods more competitively. Chinese authorities, on the other hand, are not wild about it, and this week they seem to be signalling that they have had enough. On Monday the renminbi dropped out of a narrow trading band and fell by 0.73 per cent.
So most Americans are thinking, "Who cares? I don't like stir-fry anyway." They should care. Dubya cares. He's got his Treasury Secretary, Henry Paulson, over in Beijing right now trying to sweet-talk the Chinese into sticking with the "reform process." Truth be told, China is experiencing an economic slowdown just like everyone else, and displaced workers are rioting in the south. Government officials would like to keep the lid on, and a weakening currency is one way to do it.
If speculators (remember them?) smell blood in the water, things could quickly get out of control. A rapid devaluation of the renminbi is in no country's best interests. Among the domino consequences would be devaluations of other Asian currencies as well as protectionist measures in the West. To defend its currency, China would have to start dumping U.S. Treasuries, driving up interest rates and exacerbating our own recession. And if we can no longer borrow from the Chinese, how are we gonna pay for all these bailouts at home?
Let's face it, the Chinese are now calling the shots. They are choking on U.S. debt and do not want the U.S. trying to inflate its way out of the current credit crisis. Zhou Xiaochuan, the Governor of the People's Bank of China, lectured Paulson earlier today. “Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” Zhou said. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.” Translation: Don't expect us to clean up your mess. No sooner were the words out of his mouth than Zhou hopped on a plane to Washington, D.C., for a Group of Thirty (G-30) meeting, at which incoming Treasury Secretary Timothy Geithner will surely hear the same message.
My fellow Americans, get ready for a lower standard of living in the coming years.
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