A short history of China’s modern economy

posted here

Of Bubbles and Busts: Which Way for China?

which includes this solid analysis:

“In 1994 China tried to cure the serious problems in their domestic economy by devaluing the yuan from 5 to 8.3 to the US dollar in order to facilitate an export driven recovery. That is a 40% devaluation! All your costs were just marked down 40% relative to the competition.

China was able to make key investments in the 1996 Democratic party campaign, and Bill Clinton championed China’s favored nation status in 1998, smoothing the way for China’s admission into the World Trade Organization in 2000, while still maintaining a deeply devalued currency that was ‘pegged’ to the US dollar. As a general note, a country does not engage in unrestricted trade with another country that maintains a currency peg after a devaluation, unless there is some significant ulterior motive. The rational economic response is to first maintain trade tariffs to control the flow of goods and the de facto subsidies and barriers imposed by an artificially manipulated currency. Whenever anyone says that a currency that is ‘pegged’ and subject to tight exchange controls is notmanipulated, except in highly unusual circumstances such as a gold standard, the people in the room just should laugh them on their way out the door.

Pegging the yuan to the dollar helped to encourage foreign direct investment, and helped to stabilize the artificially low prices that US importers could achieve, most notably the Arkansas based WalMart.”

Giving China the favorable trade status without requiring them to eliminate the currency peg was a tremendous blunder.


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