It's not a floating currency, it's directly controlled by politicians. Holding yaun is taking a speculative currency bet on the competency of the Chinese Communist Party to successfully manage the Chinese economy.
Yeah, and given the results of the past decade I'm inclined to trust the Communists... Not that they're actually communists; they're just a really big national corporation, imho.
China, not the Fed, has ultimate control over their monetary policy. They can always change their monetary policy and probably will have to. Which is what the discussion is in fact about, if you read the original article.
If the Chinese keep up their peg, holding RMB is equivalent to holding dollars.
If they fail to maintain the peg, the RMB will most likely rise. Most US consumers are already exposed to the downside of this risk - they have expenses which will rise if the RMB goes up (e.g., all the goods they purchase which are made in China).
Why would you need to visit China to have an opinion that could be arrived at by looking at financials - a common practice in measuring success. Just look at a portfolio of large Chinese companies - they are doing well, thus I would also hypothesize that they are well-run companies.
Chinese firms are riding a huge wave of growth driven by wage differentials. In this macro context, it's easy to make a lot of money with poor management.
Trust them to do everything they can to keep it growing. People are in China are only generally content with their government because every year everyone gets richer and richer, except the family five blocks down the road that had their house confiscated and compensated only 25% market price because the local council is planning to build a `public facility` on the land.
I expect them to keep activity very high, but I don't expect them to allocate capital well in a way that will result in much profit and sustainable growth. This could last for a while, but IMO it's very unstable and could blow up faster than many expect.
Part of my reasons for believing this are stated in this presentation (which has been posted on HN, iirc):
Horrendous action, no doubt. But there was an interesting follow-up:
"Prior to Kelo only eight states specifically prohibited the use of eminent domain for economic development except to eliminate blight: Arkansas, Florida, Illinois, Kentucky, Maine, Montana, South Carolina and Washington.[30] By July 2007, 42 states had enacted some type of reform legislation in response to the Kelo decision. Of those 42 states, 21 enacted laws that severely inhibited the takings allowed by the Kelo decision, while the rest enacted laws that place some limits on the power of municipalities to invoke eminent domain for economic development. The remaining eight states have not passed laws to limit the power of eminent domain for economic development." (from the same link)
Proverbs 13:8 "A person’s riches may ransom their life, but the poor cannot respond to threatening rebukes."
I was thinking about it in relation to the US legal system, but it applies to politics as well. If some local politician tries to screw you over, the appropriate response is to throw money at the court of local opinion and whoever will run against them and destroy them at the next election.
After all, if they abuse politics as a means of enriching themselves, they are unworthy to hold office.
Kick up a stink, force a by-election, start taking out ads against them in the papers etc.
Accuse them of corrupting the youth of Athens (worked for Socrates opponents).
Not without also trashing it for those in China using it as a store of value, and not without the cost of price instability being imposed upon anyone selling/buying goods with the currency during the process.
You can if every thing they want to buy is made in your country.
The US can't half the value of the dollar to boost exports because everything in Walmart that is made in China will double in price.
China can because everything it's people want to buy in GreatWall-Mart is already made in china. As long as the government steps in to subsidize imported fuel the people wouldn't notice as long as they didn't travel - and you don't want them to travel anyway.
But I suspect less so in china than the US. I doubt that a major part of the Chinese diet is exotic fruit flown half way around the world out of season.
China does have oil reserves and could always 'spread democracy' to some 3rd world country if it needed more.
