$1 = 7.88Rmb

[skibum]

We were talking about the exchange rate last night. We still have not resolved the problem as to which country wins. The US wants the rmb to get stronger so that our balance of payments is better. We both agree on this. But, when we pay our debt to China, does either country win or lose?

 

Me: We will pay back the $ we borrowed with $ so there is no change.

 

She: But China has to buy things like oil with $ so China gets hurt because each$ costs more RMB.

 

Me: But China pays for oil with $ so we repay the loan, the money goes to the Russians for oil so no problem.

 

She: Yes, but the companies have to buy the oil from the govt with RMB.

 

Me: No problem, just raise the prices to the consumer.

 

She: You still don't get it!!! You need a course in economics.

 

 

I am sure this issue will keep us going for a while but I do know that our next trip to China will cost more.

[stacato]

We were talking about the exchange rate last night. We still have not resolved the problem as to which country wins. The US wants the rmb to get stronger so that our balance of payments is better. We both agree on this. But, when we pay our debt to China, does either country win or lose?

 

Me: We will pay back the $ we borrowed with $ so there is no change.

 

She: But China has to buy things like oil with $ so China gets hurt because each$ costs more RMB.

 

Me: But China pays for oil with $ so we repay the loan, the money goes to the Russians for oil so no problem.

 

She: Yes, but the companies have to buy the oil from the govt with RMB.

 

Me: No problem, just raise the prices to the consumer.

 

She: You still don't get it!!! You need a course in economics.

 

 

I am sure this issue will keep us going for a while but I do know that our next trip to China will cost more.

 

 

Ski, I am not an expert but I think that the US had been pressuring to China to lower the Yuan so that US goods will be cheaper for them to buy, thus giving a boost to US exports to China

[LeeFisher3]

The US would love to have the RMB traded on the open market which would allow the currency to be manipulated just like everyone else's and the Chinese don't desire that as it makes it more difficult to stabilize their economy.

 

It's all about self interest and self preservation, while I understand the US point of view I feel the Chinese are very wise not to allow their economy to be played with from the outside for now, they have enough economic problems and the outside influence could easily turn their economy into total chaos and have a major impact on the rest of the world.

[Robert S.]

It will cost a little more money in dollars to equal the same number of RMB. It is now a little more expensive for American individuals. But I doubt if there will be an appreciable increase in American exports to China. Anything they want they can make it cheaper anyway. Chinese people would like to buy more American finished goods but highly restricted availability, and price with markup of the item limit this expansion. Even if the RMB became much more valuable it still would be difficult to buy American made goods in China simply because of near-nonexistent availability.

[SheLikesME?]

Knock on wood, I win

[Peachy]

Entertaining and easy-to-understand no b.s. lesson on economics:

http://www.fff.org/freedom/fd0503g.asp

 

In response to this question, see page 9:

 

Let¡¯s look at just one of the baker¡¯s needs ¡ª flour. How does the wheat farmer know whether there¡¯s a surge in demand for bakery products? The short answer is that he doesn¡¯t. All he knows is that millers are willing to pay higher wheat prices, so he¡¯s willing to put more land under cultivation or reduce his wheat inventory. In other words, prices serve the crucial role of conveying information. Moreover, prices minimize the amount of information that any particular player involved in the process of getting flour to the baker needs in order to cooperate.

 

What if politicians thought that flour prices were too high and enacted flour price controls in the wake of a surge in demand for bakery products? Would wheat farmers put more land under cultivation? Would millers work overtime to produce more flour? The answer is a big fat no because what would be in it for them? The result would be flour shortages, but the story doesn¡¯t stop there because mankind is ingenious about getting around government interference. If there were flour price controls, we¡¯d see black markets emerging ¡ª people buying and selling flour at illegal prices. That¡¯s always one effect of price controls. Another would be the corruption of public officials who know about the illegal activity but for a price look the other way.

 

In 302, the Roman emperor Diocletian commanded, ¡°There should be cheapness,¡± declaring, ¡°Unprincipled greed appears wherever our armies ... march.... Our law shall fix a measure and a limit to this greed.¡± The predictable result of Diocletian¡¯s food price controls was black markets, hunger, and food confiscation by his soldiers. Despite the disastrous history of price controls, politicians never manage to resist tampering with prices ¡ª that¡¯s not a flattering observation of their learning abilities.

 

Other good observations:

 

Which is the best method of resolving conflict over what¡¯s produced, how and when it¡¯s produced, and who¡¯s going to get it? Among the methods for doing so were the market mechanism, government fiat, gifts, or violence. The answer is that economic theory can¡¯t answer normative questions.

 

Normative questions deal with what is better or worse. No theory can answer normative questions. Try asking a physics teacher which is the better or worse state: a solid, gas, liquid, or plasma state. He¡¯ll probably look at you as if you¡¯re crazy. On the other hand, if you ask your physics teacher which is the cheapest state for pounding a nail into a board, he¡¯d probably answer that the solid state is. It¡¯s the same with economic theory, as opposed to economists. That is, if you asked most economists which method of conflict resolution produces the greater overall wealth, they¡¯d probably answer that the market mechanism does.

 

The bottom line is that economic theory is objective or non-normative and doesn¡¯t make value judgments. Economic-policy questions are normative or subjective and do make value judgments ¡ª questions such as: Should we fight unemployment or inflation, should we spend more money on education, and should the capital gains tax be 15 percent or 20 percent? It¡¯s in the area of value judgments where there¡¯s so much disagreement among economists.

 

Keeping the distinction between nonnormative and normative in mind is very important, so let me elaborate a bit. Take the statement: The dimensions of this room are 30 feet by 40 feet. That¡¯s an objective statement. Why? If there¡¯s any disagreement, there are facts to which we can appeal to settle the disagreement, namely getting out a measuring instrument. Contrast that statement with: The dimensions of this room should be 20 feet by 80 feet. Another person disagrees, saying it should be 50 feet by 50 feet. There are no facts to resolve such disagreement. Similarly, there are no facts to which we can appeal to resolve a disagreement over whether the capital gains tax should be 15 percent or 20 percent, or whether it¡¯s more important to fight inflation or unemployment.

 

The importance of knowing whether a statement is nonnormative or normative is that, in the former, there are facts to settle any dispute, but in the latter, there are none. It¡¯s just a matter of opinion, and one person¡¯s opinion is just as good as another. A good clue to telling whether a statement is normative is whether it contains the words ¡°should¡± and ¡°ought.¡±

[Rakkasan]

I am sure this issue will keep us going for a while but I do know that our next trip to China will cost more.

 

No offense skibum but I hear this same flawed complaint whenever the news reports gas prices have risen by .25 and how much it is "going to impact the vacations for a typical family of 4 this year".

 

Consider this if you travel 1000 miles from your home to Disney World in a car that gets 20 miles per gallon the total increase in the cost of fuel for your trip would be around $25.00. If your vacation for a family of 4 hinges on $25.00 you should not be considering this type of vacation anyway. As far as the rmb is concerned, on my last trip I took approximately $1500 US with me. If I converted all of it at the current rate of 7.88 rmb I would have 11820 rmb, if I converted it at the preferred rate of 8.00 rmb I would have 12000 rmb. I sure hope my next trip to China doesn't hinge on 180 rmb.

 

I sorry if this respose sounds rude, but these minor currency flucuations are only important if you are trading large amounts of currency, as in millions of US dollars.

Edited October 30, 2006 by Rakkasan (see edit history)

[C4Racer]

Me: We will pay back the $ we borrowed with $ so there is no change.

 

She: But China has to buy things like oil with $ so China gets hurt because each$ costs more RMB.

 

Me: But China pays for oil with $ so we repay the loan, the money goes to the Russians for oil so no problem.

 

 

????????

Not sure I see the arguement correctly, but then I don't see it as a simple rmb-dollar senario. When the RMB becomes stronger or the exchange rate drops per se, it takes less RMB to buy the dollar. At 8.21 it takes 9852rmb to buy 1200usd worth of goods or oil. At 7.88 it takes only 9456rmb to buy the same 1200usd worth of goods or oil.

This sounds good for China at first, but in reality it could spell disaster for their economy. Right now, their economy is driven mostly by exports. Keep the exchange rate higher, yes it takes more RMB to buy the same dollar. The key is the price of their goods is lower. This will cause a higher demand for their product on the open market. Lower the RMB and you raise the price of exports from China. This will lower the demand for their products. They want to make sure the price of their goods is in demand on the open market. This is where they will get the RMB to buy the oil. Loans needing to be repaid are a mere drop in the bucket compared to money generated by their product on the open market. Remember, it seems everything is made in China. This is because the cost is low enough other countries flock to buy their exports.

The only reason China is moving the RMB - Dollar exchange rate now is pressure from the US and European Open Market. They fear boycots of their products if something doesn't take place. The boycott will come in the form of other governements placing high tarriffs on things imported from China. This is the same pressure that was applied to Japan. China needs to keep the exchange rate artifically high until like Japan, the quality of their goods becomes better. Once the Chinese exports stand on their own quality, then we might see an exchange rate that falls in line better to what the other governments want. Until then it is in China's best interest for the Chinese government to have a tight control on it and keep it artifically high.

Edited October 30, 2006 by C4Racer (see edit history)

[skibum]

Acctually I was just trying to show how our evenings are spent! I have never worried about the exchange rate when traveling to Asia.

 

I think that after many years of strenghting the RMB, China will allow it to float.

[Stone]

We were talking about the exchange rate last night. We still have not resolved the problem as to which country wins. The US wants the rmb to get stronger so that our balance of payments is better. We both agree on this. But, when we pay our debt to China, does either country win or lose?

 

Me: We will pay back the $ we borrowed with $ so there is no change.

 

She: But China has to buy things like oil with $ so China gets hurt because each$ costs more RMB.

 

If the above conversation is predicated on the assumption that RMB appreciates against the U.S dollar, then I cannot see how your SO concluded that China gets hurt from importingg oil. If RMB appraciates in value against the dollar, it will actually cost LESS in RMB to buy the same amount of oil from international markets. Let's say it costs $65 for one barrel of oil. At $1=8.21RMB, one barrel of oil costs 533.65RMB, wheras if RMB rise to $1=7.88RMB, then one barrel will cost 512.20RM.

 

If RMB appreciates even further, China companies which use a lot of oil (gas) can afford to buy more from international markets. On the other hand, Chinese textile manufactueres will find it more difficult to sell abroard.

 

From China standpoint, the appreciation of RMB against the dollar will help reduce China inflation, but will hurt mass employment. From U.S standpoint, the appreciation of RMB against the dollar will help US with employment, but might hurt U.S inflation rate.

 

Yes, from $1=8.21RMB to $1=7.88RMB does not seem a lot. But if RMB goes up further like $1=4.00RMB, for those Americans who contemplate travelling or retiring in China, China will be an expensive destination. After all, China is approaching $1 trillion in foreign exchange reserves, surpassing Japan as the World #1 in reserve. Now, if China decides to diversify its mass foreign currency reserve into Euro or Japanese Yen, you will probably see a rise in American mortgage interest rate and further drop in the U.S. real estate market.

[SheLikesME?]

B)

Knock on wood, I win

I sent as much over as I could. Now if that hotel does not go belly up.

[Feathers268]

Actually, the US has been pressuring China to allow the Yuan to flutuate freely so it can strengthen against the dollar. It would raise the price of Chinese goods making American products more competitive. In the long run it would help China but would hurt at first as the US would buy less. In the mean time, it just might be a good time to invest in Chinese realistate or currency before it starts to clime.

[skibum]

I see her mistake now. The $ will cost fewer RMB not more. Why did I not see that and jump on her error.

 

Well, it keeps our time together interesting.

 

So many well informed membors on the board!

[Robert S.]

I just don't see how the US has hardly any ability to sell more to China except raw materials. There is just no framework to accomplish this. Wal-Mart is not going to do it, they sell only cheap stuff. We might sell more large machines of some kind but that is only going to benefit a few companies. Chinese consumers have no access to American made goods.

[Trigg]

I am sure this issue will keep us going for a while but I do know that our next trip to China will cost more.

 

No offense skibum but I hear this same flawed complaint whenever the news reports gas prices have risen by .25 and how much it is "going to impact the vacations for a typical family of 4 this year".

 

Consider this if you travel 1000 miles from your home to Disney World in a car that gets 20 miles per gallon the total increase in the cost of fuel for your trip would be around $25.00. If your vacation for a family of 4 hinges on $25.00 you should not be considering this type of vacation anyway. As far as the rmb is concerned, on my last trip I took approximately $1500 US with me. If I converted all of it at the current rate of 7.88 rmb I would have 11820 rmb, if I converted it at the preferred rate of 8.00 rmb I would have 12000 rmb. I sure hope my next trip to China doesn't hinge on 180 rmb.

 

I sorry if this respose sounds rude, but these minor currency flucuations are only important if you are trading large amounts of currency, as in millions of US dollars.

 

 

On a personal level, I totally agree. Very little impact considering the modest decline.

 

The RMB will continue to strenghten as China moves into closer compliance with the WTO regulations. The last thing China wants to do is go from a pegged rate to a floating rate overnight. It devastate the Chinese economy with massive unemployment and social unrest. It ain't gonna happen that way.

 

If you look at the current rate, it has fallen nearly 5% from the old 8.27 exchange rate. Everything bought by the consumer countries is 5% more expensive now. For 5%, are they looking at other cheap manufactures? You bet and will look harder as their cost increases. And we are talking 5% of billions of trade dollars annually.

 

The US and China will both need to adapt to this new dynamic. China will need to create employment for displaced workers in the export industry. Inflation will hit the US in the form of a price-push. If a company has to now pay $105 to replace a sold product they bought for $100, you think they are going to take the hit on their bottom line? If they want to stay in business, they will raise the price to preserve their margin. After all, you can't get rich when you take a loss on every sale by increasing the volume.

But wait, there's more. My son's boss sells/buys from China. Recently he went to Beijing on business. He came back and told us that some of his business acquaintances in China are now 'outsourcing' some of there work. Imagine that--we outsource to China and they outsource to??? Seems soon the only manufacturing jobs will go to the poorest countries.

Anyway, if china is outsources items that are manufactured for US companies who have outsourced to China, how long will it be before the US companies catch on and bypass the middle man (China)??