Tuesday, November 17, 2009

Reflection on China Yuan and US Greenback

The Greenback keeps on sliding against many currencies of the world. The price of gold has been going up due to people ditching Greenback to buy gold.

The sliding of Greenback, couple with low interest rate, provides many opportunities for forex speculators to make big profit from forex trading.

On the other hand, China has indicated the intention to allow China Yuan (RMB) room for moderate appreciation. While there are pressures everywhere on China’s government to let China Yuan (RMB) appreciate, I feel that China is doing the right thing to let China Yuan appreciates slowly. The fact is China is moving towards pegging China Yuan (RMB) to a basket of currencies, mean that China Yuan (RMB) will appreciate.

It is certainly dangerous to allow China Yuan (RMB) to appreciate 20% against Greenback. This will cause havoc to the world’s economy. After all, many countries are relying on importing cheap China-made goods to moderate the cost of living. If the cost of shoes and clothing suddenly shoot up by 20%, how are the governments in those countries going to help their residents?

For many export-led Asian countries, it’s bad enough to have strong home currency, and a weak dollar. The export is affected, and thus the GDP. If the China Yuan appreciates so much, that China-made goods become so expensive, the impact on Asian countries will be negative. After all, so many raw materials and finished goods come from China.

The depreciation of Greenback against major currencies means that many multi-national companies listed in NYSE can report better earnings. After all, they are selling to the whole world, and they have plants in different plants of the world.

It’s just that the reporting currency is the Greenback (USD). Assuming that the Greenback (USD) slides 3% against most currencies, the annual reports of those companies suddenly get better by 3%.

The problem is how low can the USD goes. The other important question is how high will China Yuan (RMB) appreciate. The China government is keeping a tight lid on the performance of China Yuan (RMB), not allowing it to appreciate out-of-control. While the US government has limited control over the depreciation of Greenback.

If this trend of China Yuan up and Greenback down continues, those US companies in China can consider moving back to US. After all, the appreciation of China Yuan, plus the cost of shipping from China to US, will erode the profit margin considerably. In this case, they might as well shift back to US, and manufacture for domestic market.

I pity those jobless people in US. It’s bad enough to lose their jobs, without the cost of necessities going up. Since Greenback depreciates against so many currencies in the world, the price of the imports will reflect a substantial increase to the average Joe in the street.

The positive side is that US-made goods will be in demand. Since demands from international market will create jobs for US-based manufacturing companies, the jobless folks can look forward to more job openings in future.

I think many people underestimate the ability of the US economy to rebound. The foundation of US economy is fundamentally strong. US is the place where people with ideas can make money. In such a place, with strong legal support, strong government support, and support from investors, the US economy will rebound.

The Greenback sliding is just a reflection of sentiment, not the signal for the collapse of the economy. I guess that is the reason for Hong Kong’s Chief Executive, Mr Donald Tsang, to say “we have to swim or sink or rise with the US Dollar.”

The economy in China has a few fundamental issues. The first is the quality control problem in manufacturing. Everyone knows how bad the quality of China-made goods can be. Unless the China government can enforce a workable national standard to improve quality, the China-made goods can only compete in price, not quality. They are going to lose out in the long-run, since the rich Chinese in China are placing high value on quality.

The second is the corruption problem, plus many gangsters in big cites. This is a potential problem for economic stability in China. How the government in China going to tackle this when so many government appointed officers are corrupted is a big question mark.

I hope Greenback can stop the sliding, and China Yuan does not appreciate too much.

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