The Chinese Government in its efforts to ensure that American buy its products, has tied its currency, the RENMINBI or YUAN, to the U.S. Dollar. (RenminbiÃ¢â‚¬”Ren Min BI– means the currency of the people of China. The Yuan is the base unitÃ¢â‚¬”equivalent to a U.S. Dollar)
However, as all foreign currency traders know, the Free Market price of the Yuan is about 10 percent higher than the official Government price.
A BLOCKED CURRENCY
No one is permitted to take more than 200 Yuan out of China. The Chinese Government knows that if it allowed its currency to trade freely, its value would go up, and consequently, foreigners would buy less of its goods. Nonetheless, the Yuans do accumulate overseas and their value appreciates in the free market.
Chinese citizens living overseas buy these Yuans and send them to their relatives in China. They pay the premium of approximately ten percent, because they know that if they send U.S. Dollars to China, the exchange rate plus fees will reduce their value below the official rate. In addition, the Chinese Government will be aware of the transactions.
Because Chinese business is doing so well abroad, money is pouring into China. The Yuan is getting plentiful and the Chinese are bidding up the prices for local goods. This inflationary pressure puts the Chinese Government in a difficult position. If it does not raise the exchange rate of the Yuan, it will have domestic inflation. If it does raise the rate, it will reduce its export trade.
Of the two alternatives, domestic inflation is the worst. With this in mind, we will see an increase in the value of the Yuan within the next few months.
EFFECT ON THE U.S.
The U.S. has the opposite problem of China. Instead of a booming economy with rising prices, we have an economy in severe decline with falling prices and full unemployment. If the Chinese raise their prices by raising the value of their currency, the poorest Americans will be hit the most.
The people that shop in Wal-Mart will see their prices go up about 20 percent as the new price plus profit and handling are included. If we integrate this new price structure into the economic picture, we can see that any recovery will be strongly weakened.