Breaking : China "revalues" it's currency ....things will now cost MORE.

[cthrumatrix]

China to value yuan against basket of currencies
By Steve Goldstein

LONDON (MarketWatch) -- The People's Bank of China said it'll dropping its yuan-dollar peg in favor of one vs. a basket of currencies. The daily trading price of the dollar vs. the yuan will continue to be allowed to float within a band of 0.3%, while the trading prices of non-U.S. dollar currencies will be allowed to move in yet-to-be announced bands. "The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies," it said.

http://www.marketwatch.com/news/newsfinder/pulseone.asp?guid=%7BD3DA52A7%2DEA37%2D455B%2DA03D%2DADD4CC7C748B%7D&siteid=mktw

What this means:

China will NOT support a strong dollar...buy less of US debt and Dollar

This means dollar is worth "less"...which means things will cost "more"

Which means "higher inflation"..."higher gas prices" since commodities are priced in dollars.

IF this US made ANYTHING it would cost less to export.


This is what Sec Treasury "Snowjob" wanted.... go figure.

[htuttle]

1. Gas was getting too expensive for them -- just read that Tuesday

So now if the yuan appreciates in relation to the dollar, which it probably will, the relative price of gas in China (in yuan) would go down. I think.

on edit (to add):
...for at least as long as oil is still traded in dollars, anyway. I bet this puts even more upward pressure on oil prices (in dollars), though.

[Frederik]

2. But it will still be pegged to the dollar?

"The daily trading price of the dollar vs. the yuan will continue to be allowed to float within a band of 0.3%"

How is that not a peg? I don't get it.

[cthrumatrix]

4. it's vs. a "basket of currencies"...the issue is "less dollars" which

means china will buy LESS of our Debt and buy less dollars

[ProfessorGAC]

10. Let's Be Very Clear About This

EVERYTHING is still pegged to the dollar. Despite the noise about the yen in the 80's and the Euro for the last few years, and despite the "chicken-littleism" of some apropos the economy, the dollar is still THE dominant world currency by EVERY statistical measure that can be performed.

It exerts, by far, the greatest overall leverage on the world economy, than any other currency. So, allowing the yuan to float is just an acknowledgement by the Chinese that their currency is no different than anyone else's currency. This is a slow, gradual admission that the controlled capitalist economy toward which they've been evolving, needs to adhere to capital market principles. Good for them. They are learning some important lessons in a big hurry.

The best capitalist systems are those that are routinely examined by the overseeing gov't, and actions taken to maintain some regulation over the flow of capital, goods, and services. This is exactly what we in the U.S. did so successfully after the Depression and into the "dereg 80's". We are now seeing the outcomes of those mistakes. The Chinese see them too. They are simply avoiding our mistakes of the past 25 years.

This is a tempest in a teapot. This is not reflective of any seismic shift in economic balance.
The Professor

[NewJeffCT]

19. thanks for the dose of sanity

I always respect your knowledge on economic issues.

It will be interesting to see if it slows down outsourcing to China - I'm guessing it's a hiccup at the most.

I had actually interviewed for an accounting position at a mid-sized manufacturer a few weeks back (maybe 2,000 US employees) and asked the hiring manager about that - something along the lines of "it seems like every manufacturer out there has operations in China, how have you been able to manage to not have operations there?" and the answer was that they're in the process of outsourcing a whole line of business to China. I wonder if they'll re-evaluate, or delay the outsourcing?

[ProfessorGAC]

22. Glad You Said That

Actually, the financial windfall that is overseas outsourcing of jobs is BY DEFINITION short term. Like every other country that has benefited from a gradual shift to capital economies, as China's middle class grows, wages will rise.

At some point, doing business WITH China rather than IN China becomes more economically beneficial. When that happens, there is almost no point in outsourcing.

Not that the short term thinkers won't be able to find developing nations for quite some time. But only two counties have over a billion people.

On the issue of expansion into China. Most of the smarter and more long term outlook firms are moving production into China, but more to serve the Chinese and eastern PacRim countries. The intent is not necessarily to move products back east. But, to make, transport and sell in that part of the world as they develop into a huge economic entity.

That's consistent with a better long term economic, rather than short term financial point of view.
The Professor

[cthrumatrix]

24. you need to take into account several factors

1) the us is at or near a hosuing bubble...based on rates... this move will mean higher rates based on inflation

2) the us enjoys today the "petro currency" advantage....OPEC will not like a weaker dollar...hence future moves might take place with the dollar (like a basket approach again)


if you want to refer to cycles...I agree...the US next cycle could be quite difficult based on the above


no fear talk...common sense

[ProfessorGAC]

27. Sorry. Don't Agree

The housing bubble is not causatively linked to currency trading values. It's just not. There is no correlation between the two that indicates a leverage of same.

Secondly, the petro-dollar thing is a neo-conservative canard. You sure you want to be on the same page with those charlatans? The foreign policy decisions that led to war in Iraq are largely rooted in this petro-dollar/petro-euro concern on their part. You're in pretty shabby company there.

Lastly, my understanding of macroeconomic causation is based upon way more factors than you apparently think. I don't think in two dimensions.
The Professor

[cthrumatrix]

26. let's be clear -- if OPEC see a "weak dollar" as bad and shifts

to a basket of currencies...this would not be good.

The chinese are brilliant traders and they know exactly what they are doing.

[ProfessorGAC]

28. Read The Other Reply To You

Sorry. You're just wrong.
The Professor

[cthrumatrix]

32. tell me where I am wrong

I am willing to see an error in how I understand the markets ...


Is it rates?

Commodity prices (oil included)?

Inflation?


All of these will go up.... and effect the US consumer.

A shift is taking place and has been taking place. I am not suggesting economic collapse. The above will put pressure on consumer spending which is the "GDP engine".

Let's watch this play out

[ProfessorGAC]

33. You Changed The Subject

I'm disputing the impact of extrinsics on the value of a currency. The currency of oil sale has no forward pressure on GDP or trade balances (aside from direct interchange between the exporter and buyer of oil), and the currency of oil expenditures are not going to exert leverage on U.S. GDP in any way.

Secondly, OPEC doesn't have the control over what currency they'll sell oil under that you ascribe. The overall economic dominance of any single GDP takes precedence over the desires of any foreign trade participant.

Now, you've shifted the focus to something with which i agree. But, the true impact of rising prices from China are going to be more rooted in investors wanting higher return and workers wanting and getting paid more as their middle class grows. A tiny shift in currency value is going to have almost a negligible impact on prices here. There are broader and more interactive elements at play here than the daily value of the two currencies against one another.

We're in agreement on the issue as you reframed it. I just think the value of the currencies and the currency of oil are irrelevant and my models indicate that irrelvancy to be true.

The Professor

[cthrumatrix]

34. OPEC does have control over thier currencies.... IRAQ switched

before the war to Euro's...and IRAN and Russia have openly talked about this.

The thought is they are sitting on "oil currencies" that were devaluing (based on the dollar).

Now...does the US want to see this...NO.


IF the currency devalues longer term based on subsequent China moves I would not be surprised at all --- and this all play into why are troops are parked in the Middle East IMHO.

[ProfessorGAC]

39. It's Irrelevant

You're missing the point. The dollar is still the dominant currency, since currency dominance is based upon economic strength, not on the choice made by one country selling a commodity.

Your point about Iraq is apropos of nothing.
The Professor

[cthrumatrix]

40. The US enjoys a liberty that no other country does by being the

petro currency of choice...this requires every country to support the dollar (by purchases) since all country is required to pay in dollars...

IF this equation were to change ..support for the dollar in the open market would be less....causing a greater problem.

Long term, I think we are in a very poor position. The only saving grace is that a healthy US is a "requirement for global trade"...if we go down it hurts everyone.

[ProfessorGAC]

41. There's No Doubt About Your Last Statement

Remember that we started the Great Depression. The collapse of our market and the deterioration of liquidity in the U.S. populace is what triggered our consumption collapse. When that happened, even in 1929, we took everyone down with us.

The Professor

[cthrumatrix]

36. Look at what Mr Greenspan just shared.... this is a "first step"

11:01 (Dow Jones) Greenspan says Chinese move on the yuan "is a good first
step." He adds, "they've been cautious, and admirably so" and "I look at is as
the first step in a number of further adjustments." (MSD)

[ProfessorGAC]

38. I Don't Respect Greenspan, At All

He's a political hack not an economic theorist.
The Professor

[idlisambar]

43. disagree, it is certainly reflective of a seismic shift

"Reflective" is the operative word. The seismic shift is actually the hollowing out of America's manufacturing base, much of it shifting to Ease Asia over the past 30-40 years. This trend and the current account deficits that result make dollar weakening inevitable vs. all major East Asian currencies, it is only the precise timeline that is in question.

[cthrumatrix]

3. notice timing of events --- here comes the housing bubble

Tues - Bush names Supreme court nominee

Wed - Greenspan gives "last" Humphrey Hawkins speech (retires soon)...hw warns about housing with rising rates

Thurs - China revalues (which means higher US interest rates...becuase of higher inflation)

Folks....the US Housing Bubble is now "in play"


While we are all focused on Supreme Court Nominee


Bush out on vacation ALL of August......

[Deja Q]

16. * is on vacation AGAIN? What is the grand master loser doing this time?

Drinking cheap wine coolers?

[dbt]

5. What's that low, RUMBLING sound in the distance?

Could it be a huge load of shit on its way to the fan?

:freak:

[cthrumatrix]

7. it's Bush's jet leaving for his "month long August vacation" while the

next "attack" will hit the US.

Puppet boy needs a debriefing....

[dsc]

6. Snow and others wanted this so that US manufacturing could have a

better shot at competing with Chinese manufacturing.

[cthrumatrix]

8. 2 things --- we don't make anything and "transportation costs" are high

thanks to rising oil... I don't see it.

[dsc]

31. talk to textile workers in NC

to name one example.

[chunkylover55]

9. Almost everyone here is missing the point. This is a good thing.

China keeps the value of its Yuan artifically low by pegging the value of it to the dollar rather than allowing its value to be determined by the free market (like the pound, Euro, and dollar).

The main point in doing this, is that it will reduce our trade deficit with China. Yes, imports from China will become more expensive because of this. But the price of imports were kept artificially by insuring the Yuan doesn't rise against the dollar. Our exports will also rise in response this move as U.S. exports become a little bit cheaper to Chinese industries.

This is a good move for the U.s. economy and jobs.

[cthrumatrix]

12. I can't see that .... for a multitude of reasons

1 The US lost it's manf base -- and we can't compete on labor costs

2 If we do make something to "ship to the US" it costs more becuase the price of transportation is rocketing becuase of oil prices...this will only get worse.

3 the real effect is "evertyhing" made abroad will now cost the us more....

4) this is the "first step" in the revalue process....Bloomberg currency experts think that ther is MORE revaluation to come.

[Deja Q]

14. Worst of all, corporate America MADE this problem...

[cthrumatrix]

17. corp america is "hedged on thier currencies"...they KNEW this was

coming...

their markets are now China and India

[newportdadde]

29. Yep guys like Buffet etc.

Watch were the big money moves if you want to see a glimpse of things to come.

[Deja Q]

13. I thought that if the US made more within its borders and exported them,

the trade deficit problem would improve.

I remember clinton being lambasted over the trade deficit issue. If things were in 1999 what they are now, would clinton be praised?!

[cthrumatrix]

15. very true...but the US cannot compete vs 3rd world labor which is where

our Govt has allowed all corp to "outsource" or move their manf base

[Deja Q]

20. In other words, the US economy is about to become toast?

[TheWatcher]

23. It will not reduce the deficit in the Short Term

It will in fact make things worse.

Interest Rates will rise, and China will not be buying as much of our debt.

This will as cthrumatrix said, cause Oil Prices to go higher, which translates to higher Gas Prices, as well as making all those cheap trinkets America is so addicted to more expensive, and a debt strapped Consumer is not going to see this as good news.

The Dollar will fall, and continue to fall because of this. Bottom support should be around 80, but how that is a good thing, I do not see.

This may a good thing for Big Corporations seeking less competition, but that doesn't transalte into better times for the rest of us.

In Bush's America, you can be sure that most of what happens economically is not going to benefit most of us. But hey, the 1% will love it.

I respectfully disagree.

Interesting Drug, though.

[chunkylover55]

11. One thing though,

is that this is really a token move by China. Economists say that the Yuan will have to rise 30-40% before it really has an appreciable affect on the trade deficit. China will never let it rise that much.

[TheWatcher]

25. So basically everything you said in your original Post is irrelevent

And completely contradictory.

Like I said, Interesting Drug.

You're wrong about this. Completely.

[chunkylover55]

37. Apparently, you have NO idea what you're talking about.

Read any business magazine or journal and you'll understand this much better. Its basic economics 101:

Cheap currency = lots of exports and less imports.
Expensive currency = high imports and less exports

China keeps its currency artificially cheap. What I said in my original post still stands. But the effect will be minimal since they are only allowing the Yuan to rise a small amount. Though, I'm sure every little bit helps, and this is probably only the first step in a series of efforts to float the Yuan against the dollar (or a basket of currencies).

If the Yuan becomes more expensive this will be good for U.S. manufacturers and exporters. One last thing, the value of the Yuan has ZERO to do with the cost of oil in the U.S.

[TheWatcher]

42. Apparently you have no idea what you wrote

Personal insults don't make a case for your wisdom either.

You yourself said in order for this to have an effect on our trade deficit they would have to raise the yuan 30-40%. You and I both know the Chinese have no intentons of doing so.

If this ends up helping a few US Companies, reducing their competition, wonderful for them, but the consequences for the economy at large will definitely not be worth it. The US does not manufacture enough real goods anymore for this to be much of a factor, since we still cannot compete with Third World Labor.

You have pretty much dodged all other assertions as to why this would be bad.

This is going to make all the cheap goods the American Consumer is so addicted to cost more, which is NOT positive.

This is going to cause interest rates to rise, which is NOT positive.

The Dollar will continue to fall. This is NOT positive.

You completely dodged the fact that this will actually make our Trade Deficit WORSE for the time being, not better. This is NOT positive.

China will not be buying as much of our debt, and that is one of the things that has kept this illusion of an economy alive. This is NOT positive. What China has done with this move is basically close the book on subsidizing the American Consumer and US Debt.

This is THE lynchpin to the whole CPI charade. The CPI charade is the lynchpin to low rates. Low rates are the lynchpin to our economy. THE CHINA PEG IS THE LYNCHPIN TO THE ENTIRE US ECONOMIC MIRAGE. This will remove the mask of there being no inflation.

I'm sorry, but if the only thing you can come up with is that a few US Companies will be a little richer, then perhaps you should re-evaluate your own knowledge of the subject matter. Especially in a country whose economic survival doesn't even depend heavily on Manufacturing anymore. WE DON'T MAKE ANYTHING ANYMORE. It isn't going to offset the negatives.

From now on, the dollar will get weaker, interest rates will increase, and gold will go up. I think the Chinese were fed up with the reaction to the Unocal bid. I think they've decided to stop subsidizing the US government and consumer.

But hey, a few companies will line their pockets.

They rest of us can just breathe a sigh of relief, right.

You cannot illustrate how this will be good for the US consumer.

Like I said, Interesting Drug.

[southernleftylady]

18. this is what my republican friend just told me abou tthis...

This is a great thing to reduce the trade deficit
Stocks have soared at this news!

[Deja Q]

21. And that's all the money-hungry ANIMALS care about.

Inhuman filth.

[htuttle]

35. Stocks have soared on the news? Maybe in Hong Kong...

...But on Wall Street, the Dow is down about -70 right now -- though I'm sure they'll come up with some 'reason' for that by later in the day...

[Javaman]

30. I wonder how china-mart is taking the news?

Oh boo fucking hoo, you corporate pricks. I don't think they will be slashing prices anytime soon.

[proud patriot]

44. Crud

:-(