2003 October 01 Wednesday
China Renminbi Currency Devaluation Seen As Inevitable

Businessweek sees the pressures building on China to devalue its currency.

The G7's Dubai declaration echoed the group's Plaza Accord of Sept. 22, 1985. That agreement also sought to bring the greenback down from its then-lofty heights. And it succeeded beyond the group's wildest expectations, as the dollar lost more than a third of its value vs. major currencies. Dubai suggests that history may be about to repeat itself, albeit to a more muted extent.

George W. Bush wants to get reelected. The job market continues to be weak while China's trade deficit with the United States continues at record highs.

Jasper Becker also sees devaluation of the Renminbi as inevitable because China can't keep buying up US government debt in order to prop up the exchange rate with the US dollar.

In June China had foreign currency reserves of $365bn. In order to keep the renminbi stable at about 8.28 to the dollar, China's central bank has to keep buying up surplus dollars and reinvesting them abroad. In practice this means buying US Treasury bonds. China's holdings of US Treasury bonds rose to a record $122.5bn last month, far more than any other country apart from Japan. Together Japan and China hold 41.9 per cent of the $1.35 trillion debt the US government owes the world.

Of course, a decline in the demand for US government debt combined with a decline in the value of the US dollar could unleash higher prices and higher interest rates in the face of an already weak labor market.

U.S. investors are worried that too rapid a decline in the dollar would kick up interest rates and could spell a sudden end to the recovery

A US dollar decline would boost the demand for US exports and at the same time it will reduce foreign competition for domestically produced goods and services. But that effect takes a while to play out.

The problem with the US economy at this point is that while while layoffs have declined hiring has not picked up.

The new numbers portray an economy stuck in neutral, with workers no longer losing their jobs at the rapid pace of 2001 but with relatively few new job opportunities popping up. In the last three months of 2002, 7.8 million jobs were eliminated, while 7.7 million were created, according to company records studied by the bureau.

My own suspicion is that US corporations are net hirers abroad but not in the US labor market.

Share |      By Randall Parker at 2003 October 01 12:56 PM  Economics Political


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