The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Save Your Breath, America!

09/24/2010

The Bush Administration started applying pressure on China years ago, to allow their currency to increase in value. This makes their exports more expensive to foreigners who buy them, like the U.S. As a result, foreigners buy less, which means China produces less, and fewer Chinese workers are needed. Layoffs increase and so does social unrest.

The Obama Administration has substantially increased that pressure on the Chinese currency. Yesterday, Chinese Premier Wen said a 20% appreciation of the Yuan would cause widespread bankruptcies in China. As their bankuptcy system is rudimentary, the impact would be far greater than we would expect.

The single more important takeaway from this series on China is how critical it is to understand the driving force behind all their decisions, i.e., stay in power by avoiding social instability. Any discussion of China without that clear understanding is wasteful.

So, Wen has made it clear that a 20% appreciation is not going to happen. Most currency analysts believe it needs to appreciate 20-45%. If Obama pushes for a fairly priced Yuan, he is far more likely to get a trade war, which would be far worse for the U.S. Like a rat, Wen is backed into a corner and likely to bite!

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