China’s currency not the problem

As a long time trader of currencies and other financial instruments, I can relate to the following quote and testify as to its efficacy (again, from the Carnegie Endowment):

In Washington, politicians and pundits have settled on a single magical solution for the country’s economic ills: getting China to revalue its currency, the RMB. By any reasonable economic measure, however, the RMB is not undervalued. China does have a trade surplus with the United States, but it has a trade deficit with the rest of the world. And China ‘s accumulation of dollar reserves is not the result of trade surpluses, but of large investment inflows caused in part by speculators’ betting that China will yield to U.S. pressure. Focusing on China ‘s currency is a distraction. If the United States wants to improve its economy for the long haul, it had best look elsewhere, beginning with raising the productivity of American workers.

Click on the headline for the full write-up in PDF format.

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One Response to China’s currency not the problem

  1. I’m going to comment on my own opening remark to the blurb on the trade deficit with China. Whereas I can testify to some extent as to its ‘efficacy’, I don’t agree with the proposition that China’s accumulation of dollar reserves is derived entirely from investment inflow.In fact, their dollar reserves are derived by both capital inflows and trade.As an aside, much of their dollar holdings are recycled back to the United States via their recurring purchases of U.S. government debt. These purchases, along with those of other countries – notably Japan – have been instrumental in keeping our long term interest rates relatively low.

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