China US trade imbalance not caused by China currency Renminbi exchange rate manipulations but US fiat moneyPeople blamed China US trade imbalance is caused by China to manipulate her currency Renminbi(RMB) exchange rate. Fundamentally, the China US trade imbalance could not grow should US not enjoying the fiat reserve currency status.Most nations including China know that US dollars, a fiat money, can enormously increase its money supply by printing money, debts issuance and extending bank credits. In simple trade terms, China has been the global manufacturers for the last decade. US should have no problem to consume China currency Renminbi to purchase China production or output. US can maintain a low inflation through the import of low costs China products. The low inflation benefited US to maintain a low interest rate or borrowing costs.
What products US trade with China other than treasury debt?On the other hand, when China sells products for US consumption in exchange for US dollars notes, China expects US to have US products to consume her US dollars. What products can China buy to consume the US dollars? You can judge yourself... We may mention a few such as viagra, coke, Johnson housewares, McDonald, SAP, Oracle, Microsoft, Starbucks... But many of these products have subsitutes and price points are still not affordable by majority of people in China, a developing country. What else can China government buy? Can China buy technology products? Yes BUT China needs to be qualified for export compliance for high end products. China is still a "strategic competitor?"... Can China buy US companies? Yes BUT China needs to go through tedious and vigorous approval process. You bet the result... Can China buy plane jets? Yes BUT China has enough planes from Boeing and Airbus to serve the reduced traffic on the global economy slow-down... Can China buy treasury debts? Definitely yes, as suggested by Hillary Clinton. BUT what is the purpose for buying these debts (effectively lending money for US consumption)? What are the benefits for China to create China US imbalance by producing products in exchange for paper debts? We have no answer BUT you can imagine that... You had a friend ever asked to borrow money from you. He however had no saving, spent more than his income every year, always sign a promisory note to repay you 10 years later. But 10 years later, he might only repay you with another promisory note... You must be very generous to continue lending money to this friend every year... Perhaps you need a second thought, right? The appreciation of China currency cannot help on the China US trade issue. For example, for an $100 jeans manufactured in China, the ex-factory cost is at most $20 (most cases are much lower than this), the rest costs are design, logistics, stock holding, return, sales & marketing, branding, advertising & promotion, finance, wholesale, retail earned OUTSIDE of China... Does that make any difference to appreciate RMB by 10% and hence raise the manufacturing cost by 10% to $22? Not much. Can US workers willing to work at the same wage level as China workers? Definitely not. These manufacturing jobs go out of China will go to another country say Vietnam, but definitely not go back to US...
China currency Renminbi gaining global confidence to become global reserve currency some day, we predict...Global nations are gaining confidence on China currency Renminbi particularly on the confidence on the purchasing power of China currency. The large foreign reserve of China ensured that countries with trade surplus can exchange their on hand RMB with US dollars, or simply held RMB as reserve.A recent incidence is that the People’s Bank of China and the Bank of Korea have announced they are establishing a bilateral currency swap arrangement. The arrangement has been agreed upon to enhance bilateral trade between the two nations. The currency swap agreement will support liquidity provision of sums up to 180 billion Renminbi RMB and 38 trillion Korea Won KRW. The important message is that China and Korea have also agreed to consider the possibility of converting swap currencies into reserve currencies. China better utilized her world's largest foreign reserve not just purchasing US treasury debts. She uses up her reserve for building oil reserve. For instance, in Feb 2009, Beijing agreed to extend US$25 billion in loans to Russian state oil producers in return for a secure fuel supply for the next two decades. This money inflow helped Russia to stablize her currency. At the same time, Russia has the flexibility to exchange oil for US dollars or just RMB in future.
Confidence on China currency is necessary for RMB to become global reserve currency. Although it is still a long way to go, we believe that China currency will become part of the global reserve currency some day...
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