Wednesday, June 9, 2010

U.S. Policy-Makers vs. The RMB

Via Bloomberg:

The U.S. Senate will vote within two weeks on a measure aimed at getting China to raise the value of its currency, Senator Charles Schumer of New York said today.

Lawmakers are prodding President Barack Obama to take a tougher line on China, which has held the value of the yuan at about 6.83 to the dollar since July 2008. Senator Sherrod Brown, an Ohio Democrat, has said a weak yuan gives Chinese exporters an unfair advantage over their U.S. competitors.

This vote will lead to a significant change. If China has to raise the currency exchange rate, the economy will hurt a lot. It may as someone would say, "lead to a disaster". The Chinese government has refused to allow the Yuan to appreciate many times. The negative results for China to raise the value of RMB are strong and direct:

- Reduction of exporting; exporting supports GDP growth and employment, and thus destabilizing society
- The economic model of China is typically of the investing pull economy. If the RMB appreciates, the cost of production will increase and FDI will decrease immediately
- China is still the biggest "factory" for the world and US consumers. The appreciation of the Yuan will directly affect product pricing
- The sudden appreciation will destroy the balance of demand and supply in China and lead to inflation

Liz T. Liu
Summer Analyst
Analyze Capital LLC

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