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Yuan Overvaluation Creating More Problems Than Solutions [Copy link] 中文

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Post time 2013-9-14 10:54:15 |Display all floors
This post was edited by abramicus at 2013-9-14 10:55

Economists from around the world are giving each other a wink and a nod that China's "rebound" from month-after-month of falling PMI manufacturing sector index may have come from expansion of credit and increased governmental spending on large infrastructure projects.  It has become evident to astute economists such as Beamish of Lombard Street Research that China is hurting from the overvaluation of its Yuan which makes Chinese products overpriced abroad (but forgot to mention that it makes Chinese produces overpriced in Yuans at home as well, as foreign products when sold in equivalent yuans, would be cheaper too).

Please, do not try to fool the leaders, or the people, with temporarizing measures that create more problems without solving the original ones.  Expansion of credit to encourage consumption only creates more inflation, because there are not enough products in the market to absorb all the newly created money in circulation.  Building more infrastructure, while possibly increasing jobs, take years to make a real return on the investment, meaning that inflation will eat away on the real purchasing power of the Yuans even as the Yuan is supposed to be rising in value against the dollar.

No more games, please!

These tricks only show that the real aim of overvaluing the Yuan is not to prevent inflation, as these "solutions" do precisely that - cause inflation.  But because they do not solve the original problem of Chinese manufacturing being unable to keep its market share abroad and at home, such growth is not real growth, just like those who are swollen in their feet from heart disease are gaining weight not because of increased muscle growth, but because of accumulation of dead weight water, which eventually will have to be removed or the economy will die from inflation.

All the while that China's manufacturing is being put on the life support of credit expansion and infrastructure expansion, foreign manufacturers are being injected with steroids as they beat Chinese products when priced in foreign currencies abroad, and when priced in yuans at home.

As if such insult is not enough, China's foreign currency reserves are being used to bolster the Yuan's value at the astronomically unrealistic rate of 6.12 CNY/USD, because contrary to the normal market mechanism, the Yuan is not being bought by foreigners in need of it, but rather by China's central bank that can create it at zero cost, except it has chosen to buy it back with China's hard earned dollar reserves.  Before, foreigners wanting to repatriate their Yuan earnings back home have to pay 7.00 yuans for every 1.00 dollar they send back home.  Now, they only have to pay 6.12 Yuans, leading to a neutralization of China's already falling trade surplus.  Even domestic importers of foreign goods have to pay only 6.12 Yuans for every 1 dollar of foreign products they are buying, allowing them a price advantage over China-made products at home.  Furthermore, bigwigs and SOES that are trying to stash their wealth abroad are given the advantage of having to pay only 6.12 Yuans for every 1 dollar they so-called "invest" abroad.  All these dollars used to pay for the Yuans that foreigners want to repatriate, that importers want to use to buy foreign products, that bigwigs want to stash abroad, come from nobody in the world but the Chinese people, through their foreign currency reserve in the PBOC.

This is highway robbery on a grand scale, and worse yet, it not only steals the golden eggs laid by the goose of Chinese manufacturing, it also is strangling the goose to death at the same time.  If this is not treason, what is?

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