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Don't Inflate China's Yuan Move All Out of Proportion

By    |   Thursday, 24 Jun 2010 09:30 AM

Politicians are a dirty breed.

They often have their own issues, agendas and views — most of which, on both sides of the isle, are wrong in my opinion.

One of the big agendas as of late is that the Chinese should devalue their currency and that the yuan is overvalued.

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However, one could argue that with the U.S. dollar index virtually unchanged since 2005 and unchanged against many currencies in that time period, it could be argued that maybe the yuan wouldn’t have rallied against the dollar.

In any respect, if U.S. government officials think that America is going to have a huge trade advantage with China if the yuan weakens — they are sadly mistaken. No nation has ever devalued its way into prosperity.

When the Chinese first revalued the yuan to $6.83 from $8.12 back in 2005 (a gain of about 15 percent) it made little to no impact on the trade data in 2007 — the U.S. was still recording record trade deficits with the U.S.

In addition, if the Chinese consumer really starts spending they will more than likely buy cars from Japan and Germany, electronics from Taiwan and South Korea and resources from Australia and Canada. I see this having little to no impact on the U.S. trade numbers.

However, what it will create is inflation down the line.

As the yuan strengthens, it will make resources (which are priced in U.S. dollars) cheaper in yuan terms and push their prices higher as China is desperate for commodities.

It is no coincidence that after the yuan was revalued in 2005, commodities soared in price the next two years.

Get ready for another huge political blunder as the rising yuan won’t help U.S. exporters but it will hinder the U.S. by creating higher inflation.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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Politicians are a dirty breed. They often have their own issues, agendas and views most of which, on both sides of the isle, are wrong in my opinion. One of the big agendas as of late is that the Chinese should devalue their currency and that the yuan is overvalued....
david,skarica,yuan,china,us
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2010-30-24
Thursday, 24 Jun 2010 09:30 AM
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