The race to the bottom – currency management in the Credit Crunch

Yesterday the yuan edged higher against the dollar as the first installment in China’s new approach to its currency after a period of pegging it to the dollar. Although the move was small, it was important. There are no guarantees of a big revaluation, and no suggestion that China will move to an unmanaged rate. However, it was important because at last we have a substantial world currency which the authorities do not wish to see fall.

Over the last couple of years the US and Uk authorities have been at best unmoved by declines in their currencies, and at times appeared to be grateful for any fall. In more recent months the Euro area has seemed relieved that its currency has started to fall against others. All the major countries have kept interest rates very low, putting people off holding their currencies and short term bonds.

The world remains divided between the hard working, high saving, successful exporting economies, and the heavily indebted, high borrowing, big importing countries. Japan has some mixed characteristics, China leads the former group whilst the US, UK and peripheral Euroland are in the second group.

To create greater balance, behaviour – and costs – have to change in both groups to level things up. Changing currency values can do some of that work for the relevant governments. China has put a new safety valve into the world economy. We need to watch the extent they allow it be used. Meanwhile the rupee has gone up reflecting India’s economic success, and taking a ltitle of the large inflationary pressure out of the Indian economy. These revaluations are Mr Osborne’s stroke of good fortune as he picks up a very difficult inheritance.

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9 Comments

  1. Posted June 22, 2010 at 7:11 am | Permalink

    if india is such an economic success why do we one of the heavily indebted,countries borrow an extra half a billion a year to give to india in "aid", they aint that short of cash as your words and their nuclear weapons programme demonstrate

    why do we have lots (many hundreds of thousands) of indian nationals (and their families) in the country on work visas getting free nhs and free schooling for their kids AND TAX DISPENSATIONS when we would get no such level playing field if working in India (if we could even get a visa which we hand out to them like confetti)

    if you could just explain the economic rationale for supporting the Indian outsourcing movement and its waves of economic migrants here on visas outside the points system, and why so many end up getting indefinite leave to remain

    (words left out)

    please dont just bite your tounge for the party line give us the real answer you know

  2. Posted June 22, 2010 at 7:23 am | Permalink

    The change in value of the yuan is certainly welcome, but it is only one part of the equation. The other is demand within China for our goods. Are the Chinese authorities doing anything to increase demand so that it imports more to help reduce the balance of payments inbalance? Are they doing anything to remove some of the red tape that discourages imports for both consumer and businesses?

    • Posted June 22, 2010 at 10:29 am | Permalink

      "The change in value of the yuan is certainly welcome,"

      But nowhere near enough, part of the reason for the crash was the imbalances built up in the world economy, this small change won't do much to rebalance it. I am surprised at the complacency of the West that they allow China to be part of the global economy, yet fix its trading terms by fixing its exchange rate. It was an arrangement designed to hollow out our economies This seems to be a lesson from history, when the British Empire found it was haemorrhaging bullion to China for tea and silks, and found that China wouldn't buy anything in exchange, then they had Opium forced on to them, I don't see what China will buy from us this time. They have to be forced to float their exchange rate with the threat that if they don’t we will put tariffs on their goods to equalise out the advantageous exchange rate they have given themselves.

  3. Posted June 22, 2010 at 9:18 am | Permalink

    A hundred years ago, China was a joke and India a loyal member of the British Empire. Racially both were despised and ridiculous (Peter Sellers – Passage to India?? Benny Hill?)
    This mindset is hard to shift.
    Now England is full of old people and young unemployables/public sector workers/quangocats living off the State which is going bust very fast. China and India, neither of which comes from a firmly enlightenment/Judaeo-Christian/industrial/scientific/liberal background are moving into the world driving seat. Mr Obama, a Chicago politician with a chip, is moving fast away from his European alliance.
    We have just two choices, don't we……

  4. Posted June 22, 2010 at 9:22 am | Permalink

    I think its down today, it was just a "Blag" before the G20.

    John, you know when (Very soon) the North sea oil/gas runs dry & NO one in their right mind will invest money in the "City" (To get raped)………how are we going to live?

    I think its time you & others started to explain to the great over weight unwashed masses that if the "3rd" world suddenly lift their standard of living, then lots of people in the 1ST world will have to massely cut theirs!

    Mike

  5. Posted June 22, 2010 at 11:06 am | Permalink

    JR: "China leads the former group "

    The problem with that assertion is that we don't actually know what is going on in the Chinese economy.

    Hugh Hendry did a bulletin from China some months ago, they have built whole cities, often on prime agricultural land, which are completely empty. This is the problem when you have a command economy, which is what China has, there is no price signal and the only directive comes from the party. Much of the vaunted prosperity of China is a mirage.

    Now if you add in the very unstable demographic of the Chinese population resulting from the ruling party's 'one child policy' too its precarious economy the omens are grim.

    I expect there will be very significant civil strife in China within the next decade, its economy will probably collapse too. I am not sure which will happen first, probably the economy.

    And one other thing, Chinese prosperity is built on, to all intents and purposes, (cheap labour with little freedom -ed). That is not something Tories should be lauding and it should be something that comes back to haunt the Labour Party and Tony Blair.

  6. Posted June 22, 2010 at 11:32 am | Permalink

    One Renmimbi does not make a summer" If this link works, ( I can't test it anymore as this new reply service won't let me see it until it is moderated); you will see that these currencies have been appreciating against the pound since mid 09. That is after our inflation buying devaluation of 08. You would think we would be flogging stuff all over the planet; but, "the race to the bottom [JR]" has put the brakes on that.

    To peg Ren'i to the US Dollar, you have to send all those dollars you imported, back to where they came from. In China's case, buying US government debt mainly. If the foreigners buy less of your debt, you have to buy it yourself

  7. Posted June 22, 2010 at 3:18 pm | Permalink

    Everything in my office and everything in my home appears to have been manufactured in China.

    And that everything includes my shoes to my pc to the locks on the door.

    Something is wrong here.

  8. Posted June 24, 2010 at 10:47 am | Permalink

    This was useful information and good news (I think) for all of us. This shows me that if we all worked together we could all win. There is a lesson here for the UK government and people.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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