Thursday, December 03, 2009
Strong and Weak Money
Vietnam recently decided to depreciate their currency, the dong, by 5%, raising concerns throughout Asia about the possibility of competitive currency depreciations. Vietnam has a strong export sector, which is facing heavy competition from other Asian producers, including China and Thailand. If labor costs cannot go lower, if productivity cannot be raised, why not make Vietnam’s exports cheaper by simply making the dong worth less, meaning a dollar or Euro goes further than it did before.
The contradiction of Asia is that every country wants their currency to be strong and weak at the same time. Strong currencies are viewed as stable, and attract investment. Yet weak currencies allow the country to export goods that seem cheap in other countries.
How will China respond to this move? They might like to depreciate the Yuan, which has strengthened 17% against the dollar since 2002. After all, that would make their exports more competitive with Vietnam’s exports. China has been marked by a very slow and consistent approach to foreign exchange. There do not seem to be any sudden changes when it comes to policy about the value of the Yuan. It’s been assumed by most observers that the strategy is simply to capture the American market with low prices (which they know we can’t resist).
China’s goal may be far more ambitious: to create a new global reserve currency. Could the Chinese Yuan be a contender for that illustrious role? Such a possibility seems unfathomable. The natural contender to the dollar is clearly the Euro, the currency of the world’s largest trading economy, the Eurozone. After the Euro perhaps is the Yen. But China’s growth is far more vigorous than that of the Eurozone or Japan. Investors of all kinds want to get in on China’s growing markets, exchanging Euros or dollars for Yuan, which steadily pushes up the value of the Yuan. Since the Yuan is stable (and in fact, standing behind it is the largest currency reserve the world has ever seen), investors have faith it will keep its value.
What does China do with it’s growing foreign exchange surplus? It’s much more than they need to stabilize the Yuan’s value. They buy assets of real value: gold, copper, rare earth elements, stocks, real estate, and of course, government bonds, many of them US Treasurys. As long as China’s growth continues to be vigorous, the Chinese economy will draw in more and more outside capital. The lion’s share of the world’s Foreign Direct Investment is in the Eurozone, but utilized FDI in China has increased 10% a year since 1999, on average.
It’s unclear whether China’s goal can succeed. But they seem to be pursuing it with some vigor, and if they cannot be the world’s reserve currency, they can at least be part of a few key currencies, finally accepted as a great industrialized power. It seems increasingly clear that the US dollar will lose its spot on that list, particularly with the recent decision to commit even more troops to Afghanistan, which will add billions to the US fiscal hole.
The contradiction of Asia is that every country wants their currency to be strong and weak at the same time. Strong currencies are viewed as stable, and attract investment. Yet weak currencies allow the country to export goods that seem cheap in other countries.
How will China respond to this move? They might like to depreciate the Yuan, which has strengthened 17% against the dollar since 2002. After all, that would make their exports more competitive with Vietnam’s exports. China has been marked by a very slow and consistent approach to foreign exchange. There do not seem to be any sudden changes when it comes to policy about the value of the Yuan. It’s been assumed by most observers that the strategy is simply to capture the American market with low prices (which they know we can’t resist).
China’s goal may be far more ambitious: to create a new global reserve currency. Could the Chinese Yuan be a contender for that illustrious role? Such a possibility seems unfathomable. The natural contender to the dollar is clearly the Euro, the currency of the world’s largest trading economy, the Eurozone. After the Euro perhaps is the Yen. But China’s growth is far more vigorous than that of the Eurozone or Japan. Investors of all kinds want to get in on China’s growing markets, exchanging Euros or dollars for Yuan, which steadily pushes up the value of the Yuan. Since the Yuan is stable (and in fact, standing behind it is the largest currency reserve the world has ever seen), investors have faith it will keep its value.
What does China do with it’s growing foreign exchange surplus? It’s much more than they need to stabilize the Yuan’s value. They buy assets of real value: gold, copper, rare earth elements, stocks, real estate, and of course, government bonds, many of them US Treasurys. As long as China’s growth continues to be vigorous, the Chinese economy will draw in more and more outside capital. The lion’s share of the world’s Foreign Direct Investment is in the Eurozone, but utilized FDI in China has increased 10% a year since 1999, on average.
It’s unclear whether China’s goal can succeed. But they seem to be pursuing it with some vigor, and if they cannot be the world’s reserve currency, they can at least be part of a few key currencies, finally accepted as a great industrialized power. It seems increasingly clear that the US dollar will lose its spot on that list, particularly with the recent decision to commit even more troops to Afghanistan, which will add billions to the US fiscal hole.
Wednesday, December 02, 2009
A Very Interesting Animation: Empires Decline
Look at this fascinating visualization of the decline of the great imperial powers of the 19th and 20th centuries. Who might be next, I wonder?
Visualizing empires decline from Pedro M Cruz on Vimeo.
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