Saturday, April 18, 2009

Currency Manipulation: China vs. Hong Kong

The chart above shows monthly ex-rates for China (red line) and Hong Kong (blue line) since 1995. Hong Kong has used a currency board to fix its exchange rate at about 7.8 Hong Kong dollars per USD since the mid-1980s. China was pegging its currency at about 8.3 Yuan per USD from 1995-2005, and now has allowed the Yuan to appreciate (and USD to depreciate) by about 18% to 6.8 Yuan to the USD over the last few years. And yet China frequently gets accused of "currency manipulation" but nobody ever criticizes Hong Kong for manipulating its currency.

What gives? If China had established a Hong Kong-like currency board to peg its rate at 8.3 Yuan/USD, would it have escaped the criticism of manipulating its currency? Should Hong Kong be criticized like China for "currency manipulation?" Are there any special or unique features of Hong Kong's currency board that differ significantly from China's policy of pegging the Yuan for many years, such that those differences would absolve Hong Kong of being a "currency manipulator"?


At 4/18/2009 1:38 PM, Anonymous Norman said...

By all accounts, the IMF or The Economist's Big Mac Index, China's currency vs the dollar is about 50% undervalued (its another 10% undervalued with respect to the Euro). This means that for every dollar the China retains in foreign reserves, now at $2T, they paid twice as much for as they should have. So, in Chinese currency they have the equivalent of a $1T loss on their books which is about 25% to 30% of their GDP. I am pleaing for some economist to tell us what this means and to uncover the problem. It is Enron-like, cheat the balance sheet (foreign reserves) to pump up the income statement (GDP). Any takers?

At 4/18/2009 4:01 PM, Anonymous gettingrational said...

China is a classic mercantilist that does not care to import goods and services that the Chinese consumer. They have built up massive treasure without any repurcussions from the major trading "partners". Gee, so what if they paid 50% too much for U.S. dollars -- it was under the guise of trading system with rules.

But, let us be fair to the Chinese people and allow imports into China so that they have choices. This can be done with raising the value of their currency by floating it compared to other Major currencies.

At 4/18/2009 5:00 PM, Blogger Bruce Hall said...

You make an economist's presumption that China's motive for undervaluing their currency has solely an economic motive. Think in terms of political leverage.

At 4/18/2009 6:22 PM, Anonymous Anonymous said...

China, like Saudi Arabia with regard to oil, is a "one trick pony". They have one thing - cheap labor. They must manipulate their currency to keep their labor rates competitive. Otherwise, we would be making our plastic toys in the Philippines or Indonesia.

At 4/18/2009 6:30 PM, Blogger PeakTrader said...

China's economic model doesn't seem sustainable, since it has been working almost for free (when social costs are included, along with selling its goods and lending its capital too cheaply to keep employment levels high). It's likely India will surpass China within 20 years. The U.S. has little or no control over foreign economic policies.

I stated before: In 2007, U.S. per capita income was $45,000 and China's per capita income was $2,000. If the U.S. gains $700 and China gains $300 for each $1,000 in trade, then U.S. income rises less than 2% and China's income rises 15% (however, when social costs are included, the U.S. may capture all the gains in trade).

At 4/18/2009 6:40 PM, Blogger PeakTrader said...

Norman, it's important to look at the real economy. China exports roughly 40% of its output and much of its imports are capital goods (for production, rather than consumer goods). Also, it's hard to believe a centralized planned economy will use limited resources efficiently.

At 4/20/2009 2:10 AM, Blogger OBloodyHell said...

> China exports roughly 40% of its output

Does that include the value of the lead in the lead-based paint on the kids toys?

> China exports roughly 40% of its output and much of its imports are capital goods (for production, rather than consumer goods).

Well, they ARE trying to play catchup, after 40 years of ignoring industrialization. That means they do need to buy a lot of capital equipment.

Also -- there are lots of comments about their shoddy local infrastructure construction. Too much sand in the aggregate, things like that, which will mean a big expense to re-build all that stuff they built fast and cheap.

Let's hope they didn't cheap out on the Three Gorges Dam. That would not be pretty.

And they can't ignore the sorts of things which modern societies take for granted for too long -- There were lots of comments during the 2008 Olympics about how filthy the air was. Just that number of people in that area will have major health problems if they don't clean things up somewhat.


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