How Will China Unwind

How long can China keep up with an overvalued Yuan? (Cartoonist credit not available.). Click for image.

How long can China keep up with an overvalued Yuan? (Cartoonist credit not available.). Click for image.

The US has recruited and helped its allies economically by offering a special exchange rate vis-a-vis the US dollar.

Devalued European currencies after WWII helped Europe to rebuild its economy – and build up substantial US dollar reserves.

Favorable exchange rates were rejigged after the 1973 Oil crisis – with European recovery complete.

Next was Japan’s turn. As Japanese economy rebuilt itself, the Dollar-Yen exchange rate was renegotiated at the Plaza Accord.

Asian Tigers followed Japan.

As Asian Tigers ramped their economies, the prop of the over-valued US dollar was pulled by the US.

Asian Crisis followed.

In parallel, the Chinese Miracle was underway.

With China as the world’s 2nd largest economy now, with humongous forex reserves, time has come to deal new hand to China.

How long will China grow at the same pace – with a expensive yuan?

2ndlook at China Changing

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Dollar-Yuan – When the dust settles

The dangerous case of the Chinese stumper

The Dragon vs. the Eagle

Will China go the Japan way …

Meshing and gnashing – The Clash of civilizations

Turning points in 20th century history

Gold grand prix – The Chinese challenge

Posted on November 3, 2011, in America, China, Europe, Politics and tagged , , , , . Bookmark the permalink. 3 Comments.

  1. Don’t you think India has the same favorable exchange rate problem.. The inflation in India is directly caused by pegging rupee to the rapidly printed dollar…

    • Very complicated theory with complex measuring systems.

      But a simple indicator …

      When you go to China – and find everything cheaper than in your home country, it usually means China has an undervalued currency.

      Similarly, when you go abroad and find everything cheap, it means that your currency is overvalued. Like the Indian rupee till the 1990s.

      Way back in the 1970s when Indian travelled with US$250-500 foreign travel allowance, everything abroad was cheap – and Indians returned with bags full of shopping – only to be ripped apart by the Customs.

      Today this situation is limited to China, and maybe some parts of ASEAN. Mostly, Indians find the home markets cheaper.

      This means Indian rupee is slightly overvalued /undervalued – depending on which currency you are comparing with.

      But when a Chinese travels abroad, everything is cheaper at home – and abroad is expensive. This means an undervalued currency.

      Till the 1990s India followed a over-valued rupee, which limited exports – but made imports cheaper. Between 1975-2000, India devalued its currency in stages to bring to near-free float. Now the overvaluation-undervaluation is marginal.

  2. I do consider all of the ideas you have presented on your post. They are really convincing and will certainly work. Still, the posts are very brief for starters. May just you please lengthen them a bit from next time? Thanks for the post.

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