Reply #73: THE WAGES OF NEO-LIBERALISM: PART 1:Core contradictions

[54anickel]

http://www.atimes.com/atimes/China/HC22Ad02.html

The US trade deficit with China ballooned in 2005 to US$202 billion, more than one-quarter of the total deficit. Rising trade imbalance between the US and China in recent years has given rise to intense pressure from the United States on China to revalue the fixed exchange rate of its currency, which had been pegged at 8.28 yuan to a dollar within a narrow band of 0.03% for a decade, from 1995-2005.

On July 21, 2005, after repeated pronouncements that no revaluation was necessary or even being considered, China announced a surprise 2% appreciation of the currency, putting it at 8.11 yuan to the US dollar. It also announced that the yuan would henceforth be pegged with the same narrow range to a basket of foreign currencies that includes the dollar, the euro, the yen and others likely to reflect China's trade relationships with the rest of the world. The components and weight of different currencies within the basket is not disclosed to the market. China appears to be following Singapore's managed-float model, keeping both weights and effective bands confidential to allow maximum flexibility within a narrow range tied to a reference peg to the dollar. Many saw it as an obvious political move to appease US pressure.

Yet US pressure on China to revalue the yuan further continues, as the trade deficit with China for January 2006 registered $17.9 billion, a 10% increase from the previous month. Total worldwide US trade deficit for the month was $68.5 billion despite a rise in US exports of aircraft and soybeans. This pressure from the US is motivated by the misguided conventional assumption that a lower exchange rate of the dollar will reduce the US trade deficit, despite clear historical data showing that past revaluations of the Japanese yen and the German mark had not reduced US trade deficits with these major trade partners in the long run.

All such revaluations did was to lower the domestic cost in local-currency terms more than raise the dollar price of Japanese and German exports. The net effect was deflation in Japan and Germany, with inflation in the US while the US trade deficit continued.

The dollar takes the form of a US Federal Reserve note, a monetary instrument issued by a central bank. The yuan takes the form of Chinese People's Currency (renminbi, or RMB) issued by the People's Bank of China (PBoC), another central bank. Both are fiat currencies issued by central banks in that they are money with no intrinsic value, not backed by gold or other species of value. Both currencies are not issued directly by their respective governments, but by their respective central banks. This means that the full faith and credit of the nation is not directly behind either of these currencies.

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