As we all know there has recently been pressure on China to appreciate their currency because of the trade imbalances seen in Europe and America. As well, other East Asian countries are running into problems with their markets because China’s currency is doing so much better then theirs. Here is a quick run down of the problems, which can help you to analyze the situation.
The biggest problem is that China’s currency is undervalued by as much as what some people think is up to 35% given them a huge advantage in the global marketplace. Over the past years the United States has lost over 2 milllion manufacturing jobs to China.
China’s holding of US treasuries is especially dangerous sitting at over 1.4 trillion US, because overtime we have given up control over our long-term interest rates to foreign nations. The amount of US treasuries held by foreigners has hit a startling number of almost 40%. This is one of China’s big techniques for currency and exchange rate manipulation, and could possibly continue to even higher numbers.
While China may not fold to foreign pressures, they also run into problems in their own country. Some of these problems include inflationary pressures because they cannot accumulate foreign reserves at the same pace as their growing economy, decreased consumer spending which is already a very small percentage of their GDP compared to net exports, and loss of manufacturing production and wage pressures for these jobs if appreciation continues.
Treasury Secretary Henry Paulson will be in Beijing next month to discuss many of these factors that has put China in this position. We will have to wait till next month to see if we may see what happened in July of 2005 when China first appreciated their currency. Articles can be found anywhere online on this topic and I think it is a great idea that if you invest in China to look into learning about China’s currency situation.