Why China won't revalue the yuan: exclusive by Loretta Napoleoni

Author Loretta Napoleoni has kindly written this guest post for Madam Miaow who requested that she draw pictures to explain what all the fuss is with the US demanding that China revalues its currency.

It could alternatively be titled "Economics for Dummies" but here it is made easy (easier/easyish). Many thanks, Loretta.

BTW, 1 Chinese yuan = 0.0948186692 British pounds

China, the US, and the Renminbi currency

The 1930s depression became ‘great’ because nations used protectionism to defend their export industry. As barriers came up the economy began to shrink and the world was planed into a global recession. Today the monetary wars waged by nations aim at increasing the competitiveness of the industry by reducing the value of domestic currency and the outcome could well be to add the world ‘great’ the current recession.

At the centre of the currency war one finds China. The world wants the renminbi to revalue but the Chinese, we are told, refuse to do that to keep flooding our markets with their products. But the real reasons are otherwise. China is still a developing country and although, as Japan in the 1960s, it is fast moving towards a sophisticated industrialization, a considerable part of its economy is constituted by companies that produce basic goods and operate with very low margins. A revaluation would force them out of business. China is also experiencing a rise in wages, much needed and welcomed by the rest of the world, which is reducing the profit margins of companies. A revaluation would halt such process. Finally, China is currently in a key transition. The 15 year plan is coming to an end and the new one has not been announced yet, no major decision will be taken in this period.

China will in the near future appreciate its currency but it will do it according to the needs of the domestic economy not to satisfy the demand of the international markets. Such process may prove too slow for the globalised economy.

The real problem is not the renminbi but the dollar. Its weakness is producing great imbalances and the rush to devalue. Korea has de facto devalued its currency to be more competitive and is now planning to increase its gold reserves to safeguard them against the unstoppable weakening of the dollar. For months the Swiss have tried to intervene on the exchange rate markets to keep their currency from appreciating against the dollar and recently thanks to the contraction of exports have managed to stabilize the exchange rate.

Because volatility in the forex market is very high, speculators use this market to gamble their money — as in the past they gambled in the property market — hence the formation of a new bubble.

What we need to prevent another credit crunch is a new monetary system, but it is unlikely to happen in the near future, until China makes the renminbi convertible.

Loretta Napoleoni is the best-selling author of Rogue Economics, and Terror Inc: Tracing the terror dollars. Tonight, she is the guest speaker at the opening gala of the Global Banking Alliance for Women Summit held in Washington DC.