(cross-posted from Ask A Foolish Question, where I responded to someone wanting to bet on the yuan. More appropriate here, I think. Comments?- jp)>>The WTO is forcing the Yuan to float as a requirement for China to be a member of the the WTO.<<To my knowledge neither the WTO-- nor anyone else-- has any such power to force China to do any such thing....do they? It would seem the only way would be if the WTO enabling treaty allows currency exchange rates to be declared as a non-tariff trade barrier--which I don't thinkis true. Anyone know for sure?Keep in mind that there are a couple very real reasons why the Chinese will not, in my opinion, just up and agree to let the yuan float on a particular day:#1: China's biggest problem is people and jobs. Right now it has turned itself into the manufacturing center of the world in many respects..and yet there are still quite a few unemployed folks in the countryside (and under-employed folks too, at places like state-owned enterprises). And, this is with the main 'negative' impacts of WTO membership still yet to really hit China; i.e., impacts that would cause all state-owned businesses to go under, unemployment in the mining industry to increase, in agriculture, etc. etc. In short, China sees massive exporting as its main ace right now; an ace that might shrivel considerably overnight if they suddenly agreed to let the yuan float. I think the old unelected men in Beijing have one equation in their mind: Floating Yuan = More Immediate Unemployment = More Social Unrest = No Communist Party = they would really have to work for a living. Or, worse. (Recent protests in Hong Kong--while absolutely unrelated to this subject-- makes that equation loom even larger than it would have 6 months ago, too).#2: This situation is a repeat of 1985: when everyone was ganging up on Japan to increase the value of the yen to help with trade imbalances and unemployment in the U.S., Canada, and Europe. In fact, from my memory, virtually every economist interviewed on TV at the time was basically saying we didn't have a trade deficit problem...what we really had instead was a Japanese exchange rate problem; and that once that was fixed, balance in the international system would be restored, and the U.S. trade deficit would shrink dramatically.James Baker, in a famous meeting (an infamous meeting, in Japan) got the Japanese to relent. For the next 7 years, the Japanese equity markets went crazy; they just kept going up and up. (We don't have any experience with such a thing, do we???!). In dollar terms, Tokyo supplanted London and New York as the 'biggest' stock exchange in the world. Japanese bought up everything from Rockefeller Center to Hawaii (it seemed); movies were made showing the Japanese menace; even Tom Clancy wrote a book where a rising Japan feels its oats and attacked the U.S. in a war. There were examples of the finest restraunts in Tokyo even sprinkling gold dust on certain meals just for the oddity. The Japanese had never felt so rich in history; they not only had 'made it'....but they were surpassing the U.S., and 'everybody' agreed that the Japanese model of economic development was the truly correct one to follow.Japanese land prices went insane. Business Week at one point reported that the dollar value of land in the Greater Tokyo area alone, surpassed the dollar value of the land of all other countries....combined. At a policy meeting in Washington DC in 1990, one wife of an American diplomat talked matter-of-factly of American being 'in decline' and Japan being 'in ascension'. When one person--me--took exception, she had at first a shocked, then a condescending look on her face.That period is now known by Japanese and foreigners alike as 'The Bubble".And it burst. And because of one management mistep after another in the ten years since then, Japan STILL hasn't recovered from the Bubble Economy that was started the day they agreed to value up their currency....at the insistence of the United States.Now, China saw this; and Chinese economists have written about it. And they've also pointed out one thing: the Japanese yen, today in 2003, is down almost 65% against the dollar....and Japan is STILL running humongous trade surpluses with the U.S. In short.... from the Japanese (and, I think, Chinese) perspective, they went through all that, and yet the U.S. trade problem still isn't 'solved' even vis a vis Japan....much less China!!!Knowing that.....just what is it you think the old men in the CCP are going to do, under international and U.S. pressure, sometime soon?I don't know, either. But one thing I'm fairly certain of: it will not be a single decision to revalue or let float the yuan.
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