[Y^^]: How long does the EU endure the quasi pegging of China?

[Y^^]: How long does the EU endure the quasi pegging of China?

2009.11.10

In the US, Chinese shoppers have been big buyers of luxury goods. Not every Chinese shoppers, but many of them look like hard-core shoppers. Their desire for spending is above average. However, Chinese consumers purchase a little in China. They are thrifty and save a lot. It makes China depend on the export instead of domestic demand.

Why does it happen?

There are a lot of reasons. One of them is Chinese willingness to consume. People say that Chinese is the economical people such as the Jews. That's why Chinese prefer savings to consumption.

But it is not enough reason, because Chinese spend a lot in the foreign countries as I mentioned earlier. Another reason is a big and widening gap between the rich and the poor in China.

The Chinese government makes an effort to get rid of the stereotype, but still prople think that 'made in China' means 'Cheaply manufactured'.

The rich prefer luxury goods, so they buy the expensive items outside China. The rich do not want to purchase 'cheapie' inside China. On the other hand most of Chinses except the risch do not have enough money to consume inside China. Therefore, the consumption in China is relatively weak in spite of the huge population.

That's why the export of China is one of the major issues. If the export decreases, the inventory will increase, the rate of operation will decrease and unemployment rate will increase. The rising unemployment rates results in social unrest. If the unemployment can not be controlled, the government will encounter the rising crime rate and the threatening civil unrest.

However, it is not easy to increase export. On demand side, the recovery of the US economy is delayed. Therefore, the foreign demand is not expected to increase.

On supply side, there is another problem from China itself. Chinese competitiveness becomes weaker. China is still a major exporter and so-called the world's workshop. But their competitiveness is diminished compare to other emerging countries.

China avoided a global crisis. That's one of the reasons why the economy of other Asian countries is likely to recover faster. But it does not mean Chinese economy is strong and healthy.

The attractiveness of the potential market make the foreign companies can not leave China. However, the merits of the factories in China become weaker and weaker. The cost of labor has risen dramatically, and the laborer do not want to be worn to a frazzle by hard work any more.

Without a sharp wage increase, the gap between the wealthy and the poor will widen. But if the working wage has gone up sharply, China's competitive edge on exporting will decrease.

That's why China depends on the exchange rate. After financial crisis from the US, China has pegged RMB(or CNY) to USD in substance.

To overcome the financial market crisis and to recover economies, FRB should print a lot of money, and the value of USD decreases.

Because of quasi pegging to USD, RMB decrease and China can maintain its competitiveness in exports.

Chinese stance can be understood. However, it balloons the trade imbalance. The demand can not increase, but the supply increases. It means the size of pie is same but China wants more. The other countries are not happy with that at all.

The US does not like either. But the US can not speak loudly, because their largest lender is China. Also, RMB follows USD, that means RMB does not become weaker than USD. It's not good, but it's not so bad for the US.

China will keep pegging RMB to USD for a while. How long do the EU and other countries endure the quasi pegging of China?