China has relented to world pressure to let its currency float, but to what extent that will happen remains to be seen. China’s state-owned banks are already stepping into the market to stem the yuan’s (renminbi) rise.
The “economic miracle” in China is pretty easy to explain when you realize that China’s currency is so undervalued. By some estimates it’s 40 per cent lower than it should be in relation to the U.S. dollar.
What that means is China’s products are artificially cheap, which has a variety of negative effects on the rest of the world. This is a major reason why manufacturing has been leaving North America and going to China. Low wages don’t hurt either!
It’s also why China has created such a massive amount of cash, mainly financed on the backs of the rest of the world through huge trade deficits. Frankly, I’m amazed that they’ve gotten away with it for so long. Why on earth would our “leaders” let that happen?
It also makes goods from the rest of the world much more expensive in China, acting as a disincentive for the Chinese to buy foreign goods. This is in addition to the barriers that companies face in exporting to China in the first place.
80 cent dollars are good for exports
Canada has benefited from a low dollar in the past. It makes our exports cheaper and helps to fuel our export businesses. Canada’s exporters have had a rougher time lately because of the strength of the Canadian dollar against the U.S. dollar.
With the comparative advantage of a low dollar gone for Canada it has been beneficial in one way: companies are forced to keep costs low but also to get better. If they can’t rely on a low dollar, they have to get better in some way.
It has also helped Canadians to be able to import goods more cheaply, but are businesses using that advantage right now to invest in equipment and machinery to make their processes more efficient and productive? Some of what I’ve read indicates they haven’t been to the extent they should.
I guess that’s a leftover of the branch plant mentality of some Canadian businesses. It could also be because banks have tightened up their credit and aren’t lending as freely as they should be so some businesses that’d like to do some capital investment aren’t able to.
Solution to low Chinese currency
Had I been prime minister, I would have recognized the damage caused by the artificially low Chinese currency. The solution would have been to push much harder to force them to change their pegged currency to a floating currency like the rest of the world.
If they didn’t change, it would have taken trade action against China at the World Trade Organization (WTO). From there I would have organized a type of floating tariff rate based on how undervalued the Chinese currency was. Imagine if the G-20 implemented this. Sure China would be upset, but maybe they’d stop manipulating their currency.
I know I’m dreaming. I don’t think there are many (any?) world leaders that have the spine to do the right thing. It’s a rare quality in politicians these days. I will be watching to see if China lets their currency truly float. If they do, I’ll be surprised.