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JakilaTheHun (99.93)

The U.S. Should Start Buying Chinese Renminbi

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January 05, 2010 – Comments (17)

Much has been made of China's currency peg, which ties the renminbi to the US Dollar at a constant rate.  It is essentially a mercantilistic policy that gives China an unfair trade advantage over the rest of the world.  The US, Europe, and even Asia seems relunctant to do anything to China that would force them to eliminate this policy, however.

But what if the US were to start buying Chinese renminbi in large amounts?  This would force China to either:

(A) Take on a huge influx of US Dollars, or

(B) Raise the currency peg, or 

(C) Eliminate the peg altogether. 

I see no reason why the US could not buy the renminbi and if most people agree that the Chinese renminbi is very undervalued while the USD might be overvalued, then why not do it?  Either the US profits off of it or China is forced to react by weakening or eliminating the currency peg.  The latter would definitely be good news for it, since allowing the renminbi to naturally appreciate vs. the dollar would help boost US exports, and bring jobs back to the US.  

Maybe I'm just thinking aloud here, but if their going to play mercantilism game, I see no reason why we can't buy their renminbi for cheap.  This will at least eliminate one factor helping to create bubbles here in the US.  

17 Comments – Post Your Own

#1) On January 05, 2010 at 6:57 PM, stocki711 (98.81) wrote:

They won't let foreign investment above a certain amount. Thus the reason the peg exists. Your idea would work though...

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#2) On January 05, 2010 at 7:15 PM, Option1307 (30.12) wrote:

Hmm, interesting idea here I'll have to give it some more thought. I guess I never really considered this. Hmm...

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#3) On January 05, 2010 at 7:20 PM, rofgile (99.41) wrote:

It would work well for independent citizens to buy ren min bi.

The one problem is trust.  Do you really trust China's currency?  I find it hardly to trust China in control of a currency than the US or Europe still.  That is one barrier to people naturally buying into China's currency.

 -Rof

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#4) On January 05, 2010 at 7:25 PM, WillSurfForFood (70.92) wrote:

Interesting idea, but how would the US buy Chinese renminbi, issue more debt? Maybe the Chinese would stop buying our debt if we started buying renminbi. 

The artificially low  renminbi is certainly a problem for other low cost manufacturing countries like Indonesia, Vietnam etc perhaps it would be a better idea for them to buy it.

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#5) On January 05, 2010 at 9:11 PM, Tastylunch (29.40) wrote:

I'm down with this. Aa a midwesterner I'm sick to death of seeing my people's livelihood's get tossed away because washington is a bunch of cowards (and to be fair us in the rustbelt just accepting it). I don't know what money we'd use to buy their currency though, we have  deficit and a trade gap after all....

In all seriousness, I think there is growing potentil for armed conflict between India and China and the renminbi is a key factor in this. I've heard of border skimrishes near Tibet where China makes secret forays into India poaching towns from India. With Pakistan so unstable I could see China using them as a proxy to provoke India into something tragic if this continues to escalate...

I do think what the Chinese will moost likely do is  let the renminbi appreciate say 6-10% when it suits them but still keep it pegged, Basically just enough to keep the US from lobbing missiles at them until they don't need us anymore.

ps thanks for reminding me I've been mispelling reminbi :(

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#6) On January 05, 2010 at 9:29 PM, kaskoosek (37.09) wrote:

The dollar is already trash.  It would only hasten the demise.

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#7) On January 05, 2010 at 10:13 PM, streetflame (30.14) wrote:

Who exactly is the US supposed to buy billions of RMB from?  Obviously the Chinese government and state-controlled banks won't.  Nor will the other countries and banks in the region which maintain modest RMB reserves, because it would anger China.  The float is so low and well controlled that US interference in the way you describe is impossible.

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#8) On January 05, 2010 at 11:19 PM, russiangambit (29.40) wrote:

Well, US could buy a lot of things if not that pesky trade deficit.  It turns out you have to produce something useful before you can exchange it for something useful. Actually much-hated Krugman was alredy beating that drum 10 years ago. But now all he wants is more stimulus so that we could buy more stuff from China with money chinese loaned us. It looks like chinese have it all figured out. I wonder when american politicians will finlly catch up? Honestly it seems everybody in the world has it figured out with the only exception of americans themselves. Is it a case similar to Ben Bernanke, where the truth hurts so much we'll deny it as long as possible?

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#9) On January 05, 2010 at 11:31 PM, Tastylunch (29.40) wrote:

russiangambit (

 I wonder when american politicians will finlly catch up?

two things I'd like to add to that

1)that's more of an "if" then a "when" if you ask me

2)Or they already know and don't care or are beholden to their interests. American politicians I think may be taking sp interest from china or american interests that are aligned with china already (wal-mart, Morgan stanley etc). I remember that scandal Gore had in the 2000 election with Chinese monk donations...

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#10) On January 05, 2010 at 11:48 PM, walt373 (99.86) wrote:

It's not in the best interest of the US to do this. Right now, the US and China need each other to prosper. China needs the US to buy their goods, and the US needs China to continue funding them. If this relationship broke down, Chinese exports and the USD would crash. We are like two Siamese twins - if one dies, the other will too. For one to try to one-up the other would not make sense, at least not right now when our economies are fragile.

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#11) On January 06, 2010 at 8:37 AM, russiangambit (29.40) wrote:

> China needs the US to buy their goods, and the US needs China to continue funding them. If this relationship broke down, Chinese exports and the USD would crash.

Yes, but how did US get in this situation in the first place? By turning blind eye for the last 10 years evn though almost every economist I read was pointing it as an issue.

By turning blind eye for another 10 years US will make situation irreversible and USD will crash anyway. But are you saying because USD won't crash today it is OK for it to crash 2 years after? If something is not acknowledged as a problem there never can be a solution found.

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#12) On January 06, 2010 at 8:58 AM, Melaschasm (53.74) wrote:

I have never understood why so many are worried about the dollar peg.  As long as China wants to be at the whim of the Federal Reserve, they can keep the peg. 

I can not remember the economic term, but basically a government can control no more than two of the following three items:  money supply, interest rates, and exchange rates.

The US controls money supply and interest rates, China controls exchange rates. 

Why would anyone consider China's policy to be more or less ethical than the US policy?

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#13) On January 06, 2010 at 9:11 AM, russiangambit (29.40) wrote:

> I have never understood why so many are worried about the dollar peg.  As long as China wants to be at the whim of the Federal Reserve, they can keep the peg. 

#12 - it is not in chinese culture to be at anybody's whim unless it is what they want and have some long term goals to use that to their advantage. Americans are feeling superior to chinese for no reason, they are not the smart ones in the pair. With so many americans doing business in China I don't understand how the US can continue to be so ignorant of the chinese culture.

In terms of the peg, peg basically means that China has to share the US monetary policy. So, if FED produces inflation, then China shares that inflation. Because China is in a better economic situation inflation is obvious there and creates bubbles in assets, which will burst again. China just went through one bubble burst 2 years ago, now they got bubbles again. When it bursts, there will be a lot of popular anger. I can only imagine what they say about US behind the closed doors. But it seems they decided that inflation is lesser evil than not being able to sell to the US. They also seem to think they can control inflation consequnces through regulation, will see.

 

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#14) On January 06, 2010 at 11:34 PM, mrindependent (35.94) wrote:

It is easy to generate dollars to purchase renmibi.  We simply have to print them.  The ccst of this policy will be "gasp" inflation in the United States.  Currently, China runs a high inflation rate because they issue lots and lots of renmibi in order to buy dollars.  I think worldwide inflation is inevitable as countries rush to issue currency in order to weaken their currencies.  Weaker currencies will initially keep labor rates competive -- which in turn will keep their workers employed.  Although I don't support hyper inflation, I do support moderate inflation (i.e. 3-6%).  This is the price necessary to battle third world mercantilism.  The pendulum needs to swing back towards inflation or our manufacturing base will go to zero.  When China stops inflating their currency, we can stop inflating ours.

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#15) On January 07, 2010 at 10:59 AM, russiangambit (29.40) wrote:

Chinese are starting to worry about inflation while US officials keep denying the possibility. US officials behave like it is us who live in the communist China.

China raises key rate. China unexpectedly raised a key interbank interest rate for the first time in five months, indicating a shift in priorities towards preempting inflation risks. The move comes a day after the People's Bank of China hinted economic growth was no longer its only goal and it would focus on managing inflation expectations as well.  

 

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#16) On January 07, 2010 at 11:06 AM, JakilaTheHun (99.93) wrote:

Russiangamit,

I saw that today.  Good move by China.  Their RE bubble is getting out of control. 

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#17) On January 08, 2010 at 11:13 AM, Melaschasm (53.74) wrote:

it is not in chinese culture to be at anybody's whim unless it is what they want and have some long term goals to use that to their advantage

#13, I agree that China will only keep the peg as long as it is in their interest to do so. 

IMO, the currency peg does not matter.  It is the bad economic policy of the US which is causing the problems.  If the US had sound economic policies, it would not matter what the rest of the world was doing, our economy would be much stronger.

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