All Pravda PublicationsAll Pravda PublicationsAll Pravda publications concerning the switch to free-floating currencies are nothing short of supportive and optimistic. For example, in examining its own Russian economic structure, Pravda quotes First Deputy Chairman of Russias Central Bank Oleg Vyugin: “Within several years, we need to smoothly switch to the floating exchange rate system and estimate the national currency more effectively. Strengthening of the national currency stimulates more investments in the country,” Moving beyond reporting on the possibility of a free-floating currency within its own national borders, Pravda has published several articles denouncing the Chinese Central Banks plans to return to a fixed rate.
Pravda has consistently sided with the United States in declaring the Chinese yuan as underestimated by 40%. Articles cover the U.S. intentions of punishing China should they decide to establish a fixed rate. The weaker the yuan, the more cheap Chinese products would flow in global markets. The U.S. opinion is that a strong yuan would only yield positive effects for the international economy. Despite the “claimed requirements” of the US administration, the Chinese Central Banks plans do not coincide, as their strict yuan has helped the Chinese economy grow by more than 9% in 2005.
Although the Chinese Bank promised a revaluation of some sort, its decision to strengthen the yuan by a mere 2.11% is considered laughable by Pravda reporters, as we believe it was simply a political stunt intended to silence, at least temporarily, the pleas of developed nations. The “generous” revaluation was followed by a declaration by Chinese officials that actual financial policy would not be altered. In short, the so-called “revaluation” will have little to no effect on Chinas trade deficit. This 2.11% (within a .3% fluctuating range) is too small to hold the necessary cut into the Chinese export earnings. In addition to analyzing how effective the revaluation will have on Chinese exports, it is also key to be on the lookout for how it will change the value of the dollar and U.S. bonds. Chinas strictly managed yuan has long had adverse effects on U.S. bonds, as China is the second largest holder of Treasury securities,
The Fed and the Treasury have to understand the potential of Chinese trade as a natural export in trade of commodities. This could be very important for a number of reasons. First, because China is so resource intensive, a substantial number of Chinese are already importing goods that will not be able to export them to any other country (most of which will be used and used by the United States for trade with China), causing U.S. and European governments to see no opportunity of being able to secure cheap, environmentally friendly trade between the two countries. Second, the Chinese currency also makes sense. Since the dollar has traded so well in the world for so long that it is far easier to export gold from the US and sell it from other nations on its way, it would be attractive to China to maintain a trade balance that is based on purchasing the cheap Chinese gold (as this is also the case today with the dollar due to the strengthening of the S&P 500 and as China purchases a larger share of U.S. Treasury-backed bonds in recent recent years). Third, the S&P 500 has been growing much faster than the U.S. and European currencies in recent years, to almost 80% of the 2.11% growth allowed by the U.S. treasury yield per share since 2007. Finally, China is already investing in cheap natural resources; it’s going to spend this, on China’s need to develop energy-intensive technology, in what will give the Chinese ample reason to continue exporting its commodities.
China has an ability to leverage trade with some of the other major Asian countries, including the U.S., as well. This will lead to an influx of goods being exported or being put to market in China, which should push up the price of U.S.-made goods by $5 or more per ton of trade. Chinese exports for export also help China pay for international gas tax, which China uses to support the government spending on education, medical care, roads, power plants, and a host of other necessities. The problem, however, is that these jobs might be outsourced to overseas corporations — China has done plenty of these in the past by hiring top military and security personnel from abroad, and it seems that some of those jobs at least have their own set of technical and financial needs that will allow China to avoid paying up for them. Additionally, as China becomes more competitive in the region, that could lead to a number of Chinese firms going to different or alternative suppliers.
There are three things that you should probably watch out for here. First, China is now investing a lot more in infrastructure, transportation, and infrastructure for transportation by rail. China has invested $10 billion so far in these industries, so while the government will undoubtedly have to look carefully at those spending projections in this context, it is still not at a cost far below the current $20 trillion spending level from the 2008 crash. Second, China is very careful to avoid moving its capital out of the country, but not in order to reduce its dependence on oil. China has invested $28 billion so far to support infrastructure projects across the country — roads and transit, a water plant, a nuclear power plant, and a few other projects that China is sure will get money back from the U.S. In general, investment in infrastructure for a domestic market like China depends not only on investments in U.S. businesses but more so on investments on China’s infrastructure and in its own resources. Third, an all-out fight over currency controls (as many are already aware) is probably not going to do much to relieve Chinese