Thursday, July 21, 2005

China revalues currency?!?

Very interesting - CNN is reporting that China is revaluing their currency slightly.
See original article here.

The actual currency change is small, but it could mean big things. Everyone focuses on the damage that China has been doing by keeping their currency artificially low, through allowing products made there to be very cheap as compared to products from other countries. There likely is some truth to this.

But, there is risk in a strengthening currency to the US also. One major one is the impact on interest rates in the US. The Chinese have been major supporters of the US budget deficit. If the Chinese have less money, they will have less money to "lend" money to the US Government to fund its overspending. This could cause interest rates to increase.

Another impact is that Chinese currency will be worth more, so Chinese can buy more. This is considered good if it helps America export to Japan. But it is bad if China starts buying American companies. There are some similarities to China now and Japan in the 80s, and there was much uproar when Japan started buying many famous American buildings. There was similar uproar when a Chinese company tried to buy Unocal (which it now looks like will be bought by Chevron, an American company).

Actually, I am surprised at the American politicians complaining about a Chinese company buying an American company. What did they expect - that China would support our Government's overspending just by buying treasury bills? The US needs the dollars that China earns to come back to the US to finance both the trade deficit and our government's budget deficit. We can't expect these to always come back in the form of treasury bills - it will also make sense for China and Chinese companies to buy other assets (including our companies). How can we expect them to support our overspending while providing major limits in what they can do with the money?

It is all rather confusing to see how everything is connected. Things are never simple. So it will be interesting to see what results come of this change in revaluation policy.

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