Understand China currency fundamentals and real impact on US economy. Both US and China regulate currency money supply and debt issuance...

We need to understand more about currency fundamentals when US comment about China manipulates China currency. We all know that US somewhat "affects" her currency by way of increasing money supply - printing money, issuing bonds and extending bank credits... It appears that US Fed proposed to print money and buy back treasury bonds / notes to boost the assets and liabilities of its balance sheet; and in a way to reduce the long yield of US treasury purposely!

Where does the US bailout money of US$7.0 trillion and stimulus plan US$7.8 trillion come from? We have no idea… If the money is from printing US dollars, the purchasing power of US dollars will be rapidly eroded and eventually destruct its value. If the money is from enormous debt issuance, insufficient demand of these treasury bonds / notes will drive the debt prices down and yields up tremendously...

Obviously manipulating money supply, debt issuance and among other actions will affect foreign exchange rate. Hence both US and China are "manipulating" the exchange rate in a similar way...

The apparent strength in US dollars in late 2008 after the burst of financial bubble was driven by the repatriation of US dollars to repay the debts, so called deleveraging, by selling overseas assets or withdrawal of investment funds. Another reason was that people lost confidence with financial institutions and money, fright from quality money, temporarily parked with treasury bonds / notes.

The US treasury should take immediate steps to restore people’s confidence on storing value with US dollars. It is disastrous that nations and people damp US dollars with its rapid erosion in purchasing power…

China follows its own roadmap to revamp its financial systems

From 2005 to 2009, China currency appreciated from RMB8.7 to RMB6.8 against US$1.0 which was talking about a 22% appreciation in 4 years.

China was greatly praised internationally to avoid her currency devaluation during the 1997 Asian financial crisis. This move prevented the spiral effect of Asian currencies devaluations. Yet the US currency has constantly devaluating against major currencies since 2001 and since then United States seriously criticizes China exchange policy.

One reason for raising this issue was because some domestic manufacturers and politicians in United States felt that devaluation of US dollars might help preserve manufacturing jobs. Yet we did not see the benefit of this US dollar devaluation policy. We saw US current account deficit to increase. The politicians then tried to blame China for the imbalances in current account as a result of the controlled RMB policy.

China followed its own roadmap to revamp its financial systems. In fact, ever since 2005 when China started to appreciate RMB, China instensified its imbalance of wealth. Most farmers and workers were still living in poverty earning less than US$200 per month and this was talking over 55% of the 1.3 billion population. The appreciation of the RMB caused more jobs to disappear and forced more low value added OEM and ODM factories without its own brands to shut down. This created a stability issue on the country as a whole.

China also faced an issue on the overcapacity of the factories. In fact, the over-supply in products led to tremendous price pressure from the export trading partners particularly in the United States. You could not imagine that a pair of jeans selling $150 in the States, China ex-factory price was only $2! A 98% of the margin earned outside China!

Do you want to know more about China currency or currency fundamentals? Please look at this page on driving forces for forex rates - keys for currency trade

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