The Easiest Way for China to Revalue its Currency?
Revalue the Yuan! How many times has the US demanded this of China?
Soon America might get its wish in an unexpected way.
Early this week the question of whether China would dump massive amounts of US Treasuries on the open market, depressing their prices and lifting interest rates precariously higher, began to spread throughout the world and then the China blogosphere. Whether or not China will do this is something I cannot predict – however the non-consensus view seems to be that doing this would hurt China less than the US. You might want to start believing it too – China has a far stronger grip on its finances than America does at this point and time.
For other views on this issue, check out the original article in the Telegraph, Image Thief’s coverage of the issue, and Diligence China’s thoughts, and this view by Paul Craig Roberts who believes China can and may well sell their US treasuries. You can also see a previous article I wrote about China currency revaluation hurting the US more than China.
China Currency Revaluation Made Easy
Is the most likely way for China to revalue her currency to let it rise naturally in the world’s currency markets, or to push down the dollar by selling treasuries on the open market?
Either method would work to make the dollar more competitive to the Yuan. But the second method would be far more painful for the US, and might just line up with China’s political interests in one way or another.
You might think this is implausible – maybe you are right, but the long term picture looks a little grim. And a taste of such potentially fatal medicine might actually be just what the doctor ordered to get Americans focused on working harder and consuming less. Sometimes painful experiences are necessary to get you moving in the right direction again. So while I hope China doesn’t choose to use it’s biggest weapon against the US, it might be in the US’ long term interests for China to do so. (put more simply, it would bring housing prices back to their long term trend much more quickly, bankrupt many hedge funds & private equity funds who made what are only now coming to be seen as risky bets, and encourage America to work harder & save more to get through the tough times created by China exercising her choice to sell their massive holdings of US treasuries)