The WSJ does there usual excellent job, producing a terrific roundup of all the related stories re the de-pegging of the Yuan.
China Drops Yuan’s Peg to Dollar
China dropped the yuan’s peg to the U.S. dollar and will let it float in a tight band against a basket of currencies. The Bush administration praised China’s decision but said it plans to monitor the implementation.
China’s Move Suggests Embrace of Flexible Rates
China’s decision to revalue the yuan marks a big step in the 30-year evolution of the global financial system toward more market-driven, flexible exchange rates.
China’s Move Strengthens White House Hand
Beijing’s decision to revalue the yuan is taking some of the steam out of the anti-China engine chugging on Capitol Hill. But not much.
Revaluation May Help Bring Balance
China’s move could lead to a decline in the dollar and upward pressure on long-term rates. It will affect many industries, but the impact is expected to be relatively minor.
Yuan Move Reflects Mounting Pressure
China’s yuan move marks a solid down payment on pledges to act responsibly as one of the world’s biggest economies, but it also risks putting the country’s financial system more at the mercy of volatile currency markets.
Economists Say Move Gives Flexibility
China’s decision will give it greater flexibility to focus on its domestic monetary policy and tinker with its exchange rate – a positive change as China opens its doors to world trade, say economists. In the short run, however, a wave of speculative money could upset those plans.
Schrödinger’s Basket
Because China’s currency-basket makeup will affect perceptions of, say, China’s demand for Treasurys, being first to figure out what’s in the basket and when the basket has changed will probably be a profitable pursuit.
The Two-Percent Solution
News Analysis: China’s decision to let its currency appreciate surely wins the country political points in Washington. But for how long? Probably not very. And that means trade flaps — and questions about U.S. competitiveness — will probably stay right on the front burner.
Treasury Yields Climb on Yuan Decision
U.S. interest rates were higher on China’s yuan decision, but the mystery surrounding the move left many investors wondering what the longer-term effect may be on consumers.
Europe Welcomes China’s Yuan Move
European officials welcomed China’s move to drop its currency’s peg to the U.S. dollar, which raised hope that a gradual appreciation of the yuan and other Asian currencies will make European exports more attractive globally.
Asian Shares Could Get a Lift
The yuan’s revaluation should give a boost to Asian shares as China’s move is seen as just the beginning of a longer-term strengthening of the yuan.
FAQ: China’s Yuan Revaluation
China finally moved to revalue its currency. Here are answers to questions about what it might mean for interest rates, inflation and trade.
A Brief History of Exchange Rates
News Analysis: Though many economists believe the global economy functions best when major economies’ exchange rates are flexible, this wasn’t always the case. An examination of the history of exchange rates.
Multimedia & More
• Q&A: What it means for rates, trade, prices
• Econoblog: What’s next? | D.C., Wall Street react
• Timeline: China’s Hot Decade
• Graphic: Stock futures’ wild ride before opening bell
• Go Figure: What move means for fund investors
• Background: History of floating exchange rates
• Video: Treasury Secretary Snow applauds step
And then there is this:
Stormy’s great post
I do not see a conundrum at all. Every time the Fed raises short term rates, the long term rates flatten: Not a conundrum.
Industry is not a place for investment; it already is cash rich and labor plentiful. The only place now is in government bills. The reason why investment does not flow elsewhere is that it is simply not needed, thus driving down long term interest rates. Complicating and adding to this problem is that many of the factories of the west simply have move. A solid proportion of industry has not created new, additional factories; they have simply relocated. Their total output has not changed, only their profits have.
Does this not explain why there are interest-only mortgages? There is a cash glut. Bernanke, to some extent, is absolutely right.
There is an enormous flow of capital and money out of the industrialized world. Some of it does return in terms of profits and salaries, but a good percentage of those profits never find their way into public coffers. The rich get very rich. There is no way longer any way of really getting a slice of those profits to pay the national bills. In addition, downward pressure on average wages continues.
Cheap labor has been substituted for investment. Credit is cheap. With profits and cheap labor at these quantities, who needs credit? I do not see this as a conundrum. The pump has been primed from every conceivable direction: tax incentives and cheap labor abroad, tax cuts at home.
Ten million Chinese work for a foreign enterprise. The size of that cheap labor force is staggering. And it is only a tip of the Chinese iceberg. And we have yet to touch India. We are living through a boom economy, except the boom is not really heard here. We are paying for it. The dimensions of that boom cause Chinese entrepreneurs to open fake off-shore businesses, pose as foreign investors, and then be eligible for all the goodies–roundtrip investors, they are called. With credit like this, is there any wonder that capital returns cannot be measured by real interest rates? Hell, I should start such a business. Bet doing so is dirt cheap. No loans required. And, you do not need real investment in automation or equipment when labor is dirt cheap. Look at what the Egyptians did with the pyramids, or the Chinese with the Great Wall.
Normal Keynesian economics was not prepared for anything like globalization of this magnitude or style. There is a glut of capital and credit and labor. And it is coming at the American taxpayer’s expense. The average American consumer is going deeper and deeper into debt. Average credit card debt in the U.S. is over $9000. And the interest rates are hefty there! And then place that number against the median wage: credit card debt then becomes one-fourth of the median wage. Some are living on a knife’s edge here.
When the bubble does burst, who will pay the bills, personal and national?
The knot that has been tied is Gordian, as Volcker says. There is no easy way out of this one. We cannot wait until China becomes a “consumer society”– a ten or fifteen year pipe dream. After China, there is India. After India, who knows.
Written by Stormy on 2005-07-24 00:16:41, Brad Setser’s web log.
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Barry,
Like I have been telling people all along, China will revalue around 5%, they will go another round of 2% or so. Expect a bond market fallout & rising rates. Long bond 30 will be king again come January.