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The government of China said Thursday that it will base the exchange rates for its yuan on a "basket" of different currencies rather than maintaining a strict ratio with the U.S. dollar, a decision that's expected to cause the yuan's value to rise. Though they did not say which currencies are in that basket, the move resulted in an immediate 2 percent appreciation of the yuan to 8.11 per dollar.
The country had long been criticized for policies that kept the value of China's currency low and exports to the United States and Europe high.
Few expect the U.S. and European trade deficits with China to change appreciably because of the revaluation, but the surprise currency-strengthening move could be a double-edged sword for the high-tech industry.
On one hand, it's likely to mute calls in Washington for punitive tariffs on Chinese goods, said John Norris, chief economist and senior fund manager at Morgan Asset Management. That would have unquestionably raised consumer prices and dinged corporate earnings.
What's new:
China plans to base the exchange rates for its yuan on a "basket" of different currencies rather than maintaining a strict ratio with the U.S. dollar.
Bottom line:
If the yuan continues to strengthen, the cost of manufacturing products such as semiconductors, computers and consumer electronics in China will rise, leading to higher prices for consumers and smaller profits for computer companies.
Why corporate earnings? During the past 11 years, Chinese exports have increased 6.5 times, Morgan Stanley chief economist Stephen Roach recently wrote in a report. But 62 percent of that growth has been driven by the subsidiaries of non-Chinese companies, include some from the United States.
"If this gets some people in Washington to cool off, then it's a good thing," Norris said.
But if the yuan continues to strengthen beyond what is arguably a token measure, the cost of manufacturing products such as semiconductors, computers and consumer electronics in China will rise, leading to--once again--higher prices for consumers and smaller profits for computer companies.
"If finished products become more expensive and sales decline, then what have you gained?" said John Greenagel, a spokesman for the Semiconductor Industry Association, a U.S. trade group. "There is no such thing as an unmixed blessing. We did not take a stand urging China to do this, and as a result we'll be watching cautiously to watch the impact."
The key for trade officials on both sides of the Pacific will be to maintain that tricky equilibrium between placating protectionists and managing manufacturing costs.
For now, Chinese officials said they will not allow the yuan to rise or fall more 0.3 percent against the dollar, once a benchmark is established. Chinese officials also kept their plans vague and gave themselves plenty of leeway to manage rates, making drastic changes unlikely.
A silver lining
There's also a significant upside to this: A stronger yuan could mean China's increasingly affluent middle class will be able to afford more products and services from American tech companies.
Clearly, America's tech giants are homing in on Chinese consumers. Earlier this week, Microsoft sued Google for hiring the main architect of the software giant's Chinese business strategy. Also this week, the analyst firm Gartner predicted that the sale of cellular phones will reach 1 billion units annually by the end of the decade, largely fueled by demand in Asia.
Additionally, Chinese businesses may absorb the cost of a new exchange rate rather than pass them onto customers and jeopardize demand, said Robert Brusca, chief economist at FAO Economics.
"It's not a question or a matter of currency. Their advantage is far, far greater than that," Brusca said. "They pay so little for their workers--two to three times less or even less than what we pay in the U.S. So even if the exchange rate moves 10 or 15 percent, it won't be something that will undermine the cost advantage that China currently has."
Computer companies should also have plans to identify alternative suppliers if the yuan really does spiral upward, said David I. Levine, an economics professor at the Haas School of Business at the University of California, Berkeley. "Those contingencies should be part of every high-tech company's plans," Levine said. "This relatively minor currency revaluation shouldn?t be putting those contingency plans in motion."
Still, industry watchers are finding reasons to fret about the Middle Kingdom. They fear China could drive up energy prices by using its stronger currency to outbid other nations for limited oil supplies. That, in turn, could dampen the global economy and consumer spending, the SIA's Greenagel said.
"It may not be as simple as some people think, that it's just going to make (U.S.) exports to China less expensive," Greenagel said. "There are other implications. We're just staying cautious."
CNET News.com's Jim Kerstetter contributed to this report.
See more CNET content tagged:
yuan, China, currency, Applied Materials Inc., basket
Have the Chinese truly found a way to get around the long-held belief that the currency of a country is strongly tied to its level of confidence in an open market (which is largely a human emotional response to artificial stimuli, be they real or imagined)?
Revolutionary or sham? Perhaps time will tell.
Have the Chinese truly found a way to get around the long-held belief that the currency of a country is strongly tied to its level of confidence in an open market (which is largely a human emotional response to artificial stimuli, be they real or imagined)?
Revolutionary or sham? Perhaps time will tell.
effort to continue Chinese export price
competitiveness.
So far as making hardware, aside from naive
arguments about the industry moving onto the
"next cheapest origin country" [http://where would that be? hmm...|http://where would that be? hmm...], I doubt that IBM is crying tears
or sweating bullets over this non-event. Then
again, they own a third stake in China's
leading hardware maker which many feel is a
no-brainer to be the world's dominant hardware
maker within the next 3 to 5 years.
effort to continue Chinese export price
competitiveness.
So far as making hardware, aside from naive
arguments about the industry moving onto the
"next cheapest origin country" [http://where would that be? hmm...|http://where would that be? hmm...], I doubt that IBM is crying tears
or sweating bullets over this non-event. Then
again, they own a third stake in China's
leading hardware maker which many feel is a
no-brainer to be the world's dominant hardware
maker within the next 3 to 5 years.
"If this gets some people in Washington to cool off, then it's
a good thing," Norris said."
A good thing for whom? US workers in the manufacturing
industry? Chinese consumers? The artifically depressed
wages both endure because of this artifically depressed
currency are not going to be improved by a measly 2%
change (now) and a 'basket-system' which garaunteed will
still benefit the Chinese government. The only people this
rather modest move is good for are those who are already
profiting from the current situation - US CEOs and PRC
government officials.
Yet, even if you avoid the socio-economic (i.e. people)
problems involved with China's export-led, low currency
fueled industrializing strategem, the dangers for the US as
a country are growing and should be clear. First and
foremost, our industrial base is being hollowed out. This is
NOT the same sort of transition we went through during
the industrial revolution. At that time, our workers moved
from agriculture to better paying industry jobs, AND
industrial innovations themselves helped make our
agriculture more efficient. Thus, while workers moved to a
different economic sector, and were rewarded with a better
standard of living as a result, America as a country also
remained (and does to this day) an actual, large scale,
producer of agricultural goods.
In the transition we see now, from manufacturing to
services/technology based jobs, the workers are moving,
but not to better paying positions on the whole. AND the
manufacturing sector is not being made more efficient by
the innovations in technology - because that sector is
disappearing altogether. There are few items of
consequence being made in America these days, and those
few that remain are slipping across the waves faster every
year.
My main warning about all of this is not ethnocentric. I'm
not biased against any group of people. The problem is
that the PRC is not led by the wil of it's people, but by a
totalitarian government with a very definite agenda.
We must remember that, until the world indeed does come
under 'One World Government', we are in a political realm
of nation-states. Nation-states compete for influence, and
they compete to win. And in order to win, other Nation-
states must 'lose'. If this competition could be waged
strictly via economics, it would be good and bad in the near
term for some, but long term could provide benefits for all.
However, this is a very bif 'If'. All too often the competition
heats up, for very human reasons, and breaks into the
realm of warfare. Germany and the UK were both the
biggest trading partners of each other, prior to WWI. Many
writers and commentators of the day dismissed the
possibility of conflict between them as 'unrealistic' based
on that fact. Obviously, it didn't work out that way.
The Chinese know the present day paradigm of nation-
states is alive and well, and are extremely cognizant of
history. And they plan every move they make according to
the premises and lessons of each. Specifically, they want
the Pacific as their exclusive sphere of influence again, and
they see only one country as a major roadblock - the USA.
With that in mind, do you think it's any coincidence that
they are buying our debt as quickly as we incur it? It's
leverage for them over us, pure and simple. Or that they
endeavor to buy whatever manufacturing, technology, or
energy company we have that is vulnerable (Maytag, IBM
personal computer division, Conoco)? What they acquire,
we no longer control. Or that they continue to take VERY
small steps in dealing with this currency imbalance vis a vis
the dollar, when it would clearly help the incomes and
purchasing power of their own people? They don't care
about their own people as much as they care more about
keeping their manufacturing bases in industry and
technology growing, while incidentally - but simultaneously
- helping ours shrink. Because, in the long term, that
speeds up the day when we can no longer challenge - let
alone dominate - them on the world political stage.
Democratic Taiwan will be the first casaulty, but if they
prevail in thwarting us on that, rest assured there will be
others - wherever they feel they have an interest (Africa,
South America, the Middle East - the PRC is a player in all
those regions now).
And if it gets to that point, the point of conflict, history
shows it's the most efficient, deep, and independent (thus
secure) Producer - of food, goods, services, raw materials,
... everything - that eventually wins the day. It's common
sense: the War Machine must be supplied, after all. Right
now the US has an advantage in food and technology, but
the latter is slipping fast as the 'brains' of the world, who
design all the geegaws and doodads, go where the money
is - China (and, to a lesser but growing extent, India). And
in terms of raw materials and manufacturing we are clearly
behind the 8-Ball, and falling further behind fast (the
former due to waste, the latter due to stupid national
policies that value 'Dollar Stores' and Wal-Mart more than
Ford or IBM).
This currency situation is simply the tip of a very nasty
iceberg. We definitely should seriously consider imposing
tarrifs on China, letting them know this in no uncertain
terms, as we still have the advantage of a huge market they
NEED to feed their industrializing and technology
ambitions. And the sooner the better, since that advantage
won't last forever - eventually the Chinese will be able to
buy their own stuff in the kinds of quantities that will make
our market look like small potatos in comparison.
We owe nothing to a non-democratic country folks,
especially one that is only interested in overtaking us, with
all due speed, on the world stage. We didn't 'trade' the
USSR, or South Africa, or anyone else into changing their
political structure to one more friendly to us, and better for
their people. The Cold War strategy of isolation and
containment worked - and while a full 'freeze out' of China
is neither possible or desireable now, we should do
whatever it takes to tilt the playing field back to our
advantage, by expressing a willingness to use those tools if
we have to.
The alternative is a national humiliation on the scale of
what the Spanish experienced in their defeat at the hands
of the up-and-coming British in 1588, or the French at
Trafalgar 1805. Once we find ourselves in the first real
dust-up with the PRC military - well equipped & trained as
they wil be, thanks to all the money we are pumping their
nation's way - we'll wonder how we could have been so
stupid.
http://jmaximus.blogspot.com
"If this gets some people in Washington to cool off, then it's
a good thing," Norris said."
A good thing for whom? US workers in the manufacturing
industry? Chinese consumers? The artifically depressed
wages both endure because of this artifically depressed
currency are not going to be improved by a measly 2%
change (now) and a 'basket-system' which garaunteed will
still benefit the Chinese government. The only people this
rather modest move is good for are those who are already
profiting from the current situation - US CEOs and PRC
government officials.
Yet, even if you avoid the socio-economic (i.e. people)
problems involved with China's export-led, low currency
fueled industrializing strategem, the dangers for the US as
a country are growing and should be clear. First and
foremost, our industrial base is being hollowed out. This is
NOT the same sort of transition we went through during
the industrial revolution. At that time, our workers moved
from agriculture to better paying industry jobs, AND
industrial innovations themselves helped make our
agriculture more efficient. Thus, while workers moved to a
different economic sector, and were rewarded with a better
standard of living as a result, America as a country also
remained (and does to this day) an actual, large scale,
producer of agricultural goods.
In the transition we see now, from manufacturing to
services/technology based jobs, the workers are moving,
but not to better paying positions on the whole. AND the
manufacturing sector is not being made more efficient by
the innovations in technology - because that sector is
disappearing altogether. There are few items of
consequence being made in America these days, and those
few that remain are slipping across the waves faster every
year.
My main warning about all of this is not ethnocentric. I'm
not biased against any group of people. The problem is
that the PRC is not led by the wil of it's people, but by a
totalitarian government with a very definite agenda.
We must remember that, until the world indeed does come
under 'One World Government', we are in a political realm
of nation-states. Nation-states compete for influence, and
they compete to win. And in order to win, other Nation-
states must 'lose'. If this competition could be waged
strictly via economics, it would be good and bad in the near
term for some, but long term could provide benefits for all.
However, this is a very bif 'If'. All too often the competition
heats up, for very human reasons, and breaks into the
realm of warfare. Germany and the UK were both the
biggest trading partners of each other, prior to WWI. Many
writers and commentators of the day dismissed the
possibility of conflict between them as 'unrealistic' based
on that fact. Obviously, it didn't work out that way.
The Chinese know the present day paradigm of nation-
states is alive and well, and are extremely cognizant of
history. And they plan every move they make according to
the premises and lessons of each. Specifically, they want
the Pacific as their exclusive sphere of influence again, and
they see only one country as a major roadblock - the USA.
With that in mind, do you think it's any coincidence that
they are buying our debt as quickly as we incur it? It's
leverage for them over us, pure and simple. Or that they
endeavor to buy whatever manufacturing, technology, or
energy company we have that is vulnerable (Maytag, IBM
personal computer division, Conoco)? What they acquire,
we no longer control. Or that they continue to take VERY
small steps in dealing with this currency imbalance vis a vis
the dollar, when it would clearly help the incomes and
purchasing power of their own people? They don't care
about their own people as much as they care more about
keeping their manufacturing bases in industry and
technology growing, while incidentally - but simultaneously
- helping ours shrink. Because, in the long term, that
speeds up the day when we can no longer challenge - let
alone dominate - them on the world political stage.
Democratic Taiwan will be the first casaulty, but if they
prevail in thwarting us on that, rest assured there will be
others - wherever they feel they have an interest (Africa,
South America, the Middle East - the PRC is a player in all
those regions now).
And if it gets to that point, the point of conflict, history
shows it's the most efficient, deep, and independent (thus
secure) Producer - of food, goods, services, raw materials,
... everything - that eventually wins the day. It's common
sense: the War Machine must be supplied, after all. Right
now the US has an advantage in food and technology, but
the latter is slipping fast as the 'brains' of the world, who
design all the geegaws and doodads, go where the money
is - China (and, to a lesser but growing extent, India). And
in terms of raw materials and manufacturing we are clearly
behind the 8-Ball, and falling further behind fast (the
former due to waste, the latter due to stupid national
policies that value 'Dollar Stores' and Wal-Mart more than
Ford or IBM).
This currency situation is simply the tip of a very nasty
iceberg. We definitely should seriously consider imposing
tarrifs on China, letting them know this in no uncertain
terms, as we still have the advantage of a huge market they
NEED to feed their industrializing and technology
ambitions. And the sooner the better, since that advantage
won't last forever - eventually the Chinese will be able to
buy their own stuff in the kinds of quantities that will make
our market look like small potatos in comparison.
We owe nothing to a non-democratic country folks,
especially one that is only interested in overtaking us, with
all due speed, on the world stage. We didn't 'trade' the
USSR, or South Africa, or anyone else into changing their
political structure to one more friendly to us, and better for
their people. The Cold War strategy of isolation and
containment worked - and while a full 'freeze out' of China
is neither possible or desireable now, we should do
whatever it takes to tilt the playing field back to our
advantage, by expressing a willingness to use those tools if
we have to.
The alternative is a national humiliation on the scale of
what the Spanish experienced in their defeat at the hands
of the up-and-coming British in 1588, or the French at
Trafalgar 1805. Once we find ourselves in the first real
dust-up with the PRC military - well equipped & trained as
they wil be, thanks to all the money we are pumping their
nation's way - we'll wonder how we could have been so
stupid.
http://jmaximus.blogspot.com
way
Cina wants, anytime China wants. China cares nothhig about
anything other than China, and China is quite ready to risk the
destruction of the rest of the world if that destructuion benefits
China.
So, in such an environment, we should listen to whatever
platitiudes are currently being issued by the Chinese
govenment?
What we should do is everything we can to acceletrate the
growth of the Internet in China. As the people begin to get open
communications with the world, the current Chinese government
will begin to fall. And that's a crash the world should celebrate.
way
Cina wants, anytime China wants. China cares nothhig about
anything other than China, and China is quite ready to risk the
destruction of the rest of the world if that destructuion benefits
China.
So, in such an environment, we should listen to whatever
platitiudes are currently being issued by the Chinese
govenment?
What we should do is everything we can to acceletrate the
growth of the Internet in China. As the people begin to get open
communications with the world, the current Chinese government
will begin to fall. And that's a crash the world should celebrate.
stake in any foreign subsidiary in China. This requirement
means that the Chinese government owns all of the subsidiary
companies set-up by foreign companies. Hard to argue that the
foreign companies remain in charge of the subsidiaries.
A couple of other thoughts on the subject of the Chinese and
trade; first, the only solution to the currency situation is to float
their currency as all others in the trading world float. If they are
unwilling to do this directly, the US should establish a leveling
fee against the yuan that effectively makes it float as concerns
imports to the US. Second, short of floating the currency, the US
should require that ALL imported products be labled with a
sticker of component origin, color coded to represent whether or
not the product was made with slave labor, prison labor, child
labor, or some other repugnant form of labor. These stickers
should be prominently displayed and a discussion of their
meaning should be easily and readily available to consumers.
- Great analysis on Chinese trade hegemony
- by July 25, 2005 3:12 PM PDT
- Only thing missing is the fact that the Chinese require a 51%
- Like this Reply to this comment
-
-
- Above in wrong subset
- by July 25, 2005 3:16 PM PDT
- My "Great Analysis..." reply was for the Saxeman comments.
- Like this
-
(20 Comments)stake in any foreign subsidiary in China. This requirement
means that the Chinese government owns all of the subsidiary
companies set-up by foreign companies. Hard to argue that the
foreign companies remain in charge of the subsidiaries.
A couple of other thoughts on the subject of the Chinese and
trade; first, the only solution to the currency situation is to float
their currency as all others in the trading world float. If they are
unwilling to do this directly, the US should establish a leveling
fee against the yuan that effectively makes it float as concerns
imports to the US. Second, short of floating the currency, the US
should require that ALL imported products be labled with a
sticker of component origin, color coded to represent whether or
not the product was made with slave labor, prison labor, child
labor, or some other repugnant form of labor. These stickers
should be prominently displayed and a discussion of their
meaning should be easily and readily available to consumers.