What does it mean when China pegs the yuan to the USD? (bond, corporation)

[ViolaLeeBlues]

Can someone explain why China pegging its currency to the US dollar is a bad thing? I do not understand how they can do that unless of course it is due to the government there controlling all the prices for items exported and such.

[Searcher521]

Oh, I think it is a good thing. As it is I believe they devalue their currency to strongly discourage the Chinese from buying imports. That keeps China a large net exporter. It has gone on way too long.

[Authenticity]

In a world that embraces free trade and globalization we want the currencies of the world to float freely and not have it's upper bounds limited by a Peg. Emerging market nations as well as developed nations in domestic recessions prefer a weaker currency to spur exports.

From a free trade point of view it is unfair to other nations that allow their currencies to float freely. Those nations lose the opportunity to have multinational corporations setup shop in their country.

From China's point of view it is to their advantage to keep their currency from rising above a certain level becuase they do not have a domestic consumption based economy like developed nations and must depend on exports to continue their growth.

America cannot really do more that pay public lip service to the chinese to save face regarding this because the chinese are still the largest purchasers of our new treasury bond issues and holder of treasury bonds. If they were to sell their holdings in the secondary market en masse that would further devlaue the dollar, which would cause oil prices to rise higher than it already is, possibly create domestic inflation, and a host of other problems.

[Retroit]

It's a bad thing if you are incompetent at running our country, which our government has proven to be. If China pegs the value of the Yuan to the dollar, that means our government is unable to manipulate our currency (something our government has blamed China for doing, ironically) by "printing more money" (i.e. issuing more debt to finance our government overspending) in order to balance our trade deficit.

I applaud the Chinese for pegging their currency. By doing so, they are making it obvious that the real problem is not so-called "manipulation" or pegging by the Chinese, but rather a failure of the U.S. government to control its overspending profligacy.

Look at it this way, suppose China used the U.S. dollar for currency instead of the Yuan. (This would truly peg the Chinese currency to the U.S. dollar!) Would the U.S. government still blame the Chinese for currency manipulation when the U.S. dollars in China are devalued exactly as much as the U.S. dollars in the U.S.? Or would they be forced to admit that the problem is not being caused by the Chinese pegging their Yuan to the Dollar, but rather by the U.S. government devaluing the dollar? It doesn't matter whether we use dollars, Yuan, gold, or seashells. It's not the currency that is the problem, it is the U.S. running unsustainable deficits/debt.

I find this whole issue quite comical. The incompetent people who are running the fiscal policy in this administration (as well as the last, and as well as a large portion of the economists who suffer from Ivy League inbreeding) can't face up to the fact that they (and the Congress) have screwed up, so they deflect the blame to China, who is doing what is in their best interest. If only our government would do the same.

A more sensible policy would be 1) eliminate the U.S. federal debt, and 2) impose tariffs on those countries that are not willing to adopt the laws that put American businesses at a disadvantage (minimum wage laws, union protection, environmental protection, OSHA, etc.).

Just for accuracy, it should be noted that China has in fact allowed the Yuan to appreciate over the years, but this has not alleviated the problem because it (or the lack of it) is not the cause of the problem. The Chinese could appreciate their currency as much as Geithner et. al. would like, but it still wouldn't make it any less expensive to do business in the U.S. relative to China. And it still wouldn't stop our overspending government from "printing more money", thus putting a greater burden on the U.S. taxpayers relative to their Chinese counterparts.

[eskercurve]

Whoh Retroit, before going on a soapbox of all the ills you put on the government, let's stick to the questions here! Not that I disagree with you of course ...

Anyway, others have already pretty well stated why China pegging to the dollar is a bad thing (fixes exchange rate and thus artificially keeps a currency more or less valuable than what the market itself would dictate its worth). Them, and a host of other countries for that matter, need to keep exporting lest their economies would stagnate because they don't have a consumer based economy.

That opposite reason is why Japan is in such a pickle right now. Their currency is worth more relative to the dollar than is "healthy" for their exports as the market has naturally reacted to the relative lack of yen to the dollar. Japan, like China, is a saving economy, and while they have a robust consumer society, it's not nearly the per capita expense that the US has (for example, most houses in Japan don't have central a/c or heating, cars are very expensive and hence why ~75% of citizens take the train, and people don't eat till their stomachs hurt).

A strong currency allows the domestic population to buy more imported goods than vice versa and runs up a trade deficit typically, and vice versa.