Monday, November 30, 2009
The Chinese Disconnect
The value of Chinese currency is not determined by supply and demand. The government controls the value by buying or selling Chinese currencies in the foreign exchange market. By keeping a fixed exchange rate with the dollar, China is able to maintain a huge trade surplus. This is not a good policy during the depression now. Because Chinese goods become so cheap that other countries have difficulties in competing with China. In other word, Chinese currency policy hammers growth in other countries.
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I do not know much about the economics of China, so this was intriguing. I was surprised to hear that China is keeping their currency devalued so that they can keep a balance of trade that is positive for them (a huge surplus). It is also surprising that nobody has forced them to change such a policy when countries like the US are often first to try to "fix" a problem or inequality.
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