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Thread: Manipulating exchange rates

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[quote=GREENMOUNTAIN           ,32932]I add my few bits to Apault’s comments: Yes, no country should be ‘told’ what to do for the benefit of another country! Meanwhile it is in each country’s interest to maintain stable, mutually beneficial international trade relationships! We live in a ‘world economy’: what happens to the economies of, say, Western European countries, USA, Australia or Japan, which all are ‘consumer driven economies’, will affect to a certain degree China’s. Countries with large trade deficits with China would like to the RMB ‘appreciate’, to slow down their own imports.Presently, the RMB is primarily pegged to the US$. Since July 2005 it appreciated at about 3%/year; this rate has increased lately. PRC’s economy grew from the 8th  to the 4th  largest in the world in only a few years, something not seen in modern history! China’s exports represent a large fraction of it's economy and make the country somewhat dependent on the buying power and needs of it’s trading partners. If the economies of Western Europe, USA, Australia, Japan, were to ‘tank’, China may find itself with a lot of unsold goods. On the other hand, if the RMB becomes too ‘expensive, people will buy lass Chinese goods. In both cases one will have to cut production and many people will become unemployed. As the percentage of Chinese goods (and services) purchased internally grows, the country will become more immune to such ‘external’ influences. Hence the conundrum: appreciate the RMB, export less and curtail growth, or keep it ‘low-priced’ and risk to have to cut production more or less unexpectedly. So far China did a very good job of managing the RMB's appreciation. I see no reason to believe that this will change. Meanwhile the ‘consumer’ part of the economy is growing fast: for instance one only has to take a clue from the annual growth in the number of automobiles sold in China. In general, economists agree on the following ‘pros and cons’ for RMB’s appreciation:Pro: increase imports (cheaper), more investments and Government spending, slows inflation, forces the economy to become more productiveCon:  May trigger a ‘hard landing for the economy and it’s growth, some companies will fail (close), may negatively affect some banks.[/quote]

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