The economic headlines are replete with pronouncements of China “de-pegging” their currency from the US dollar.  China’s central bank has kept the currency relatively fixed to the price fluctuations of the US dollar for two years now.  What is China’s currency, and why does it matter what value it has?

The Renminbi vs. the Yuan

Many people get confused when talking about China’s currency.  Some talk about the renminbi, while others speak only of the yuan.  They are virtually identical, with the yuan referring to their “dollar”, while the renminbi refers to the overall unit of currency.

Renminbi is actually three words – Ren Min Bi – and translates to “People’s Money”.

The Chinese  renminbi is currently trading at around 6.8 yuan to the US dollar.  If that value drops then one could say that the Chinese currency “strengthened”, since it now takes fewer yuan in order to equal one of our dollars.  Likewise, a higher value signifies a “weakening” of the currency, since it now takes more Chinese yuan to  equal a US dollar.

The economic pundits would have us believe that the Chinese yuan will strengthen over the coming weeks and months, causing Chinese products to become more expensive to their overseas buyers – and helping to make US and European goods more cost competitive.  It is believed that this will help to bring our economy out of the downturn by bolstering manufacturing and export trade.

What you won’t hear in the media is that this interpretation is flat out wrong.

China is no different from every other industrialized nation.  The international banks have shut off the “credit valve” all over the world – including China.  China’s government has responded exactly like our government – by creating vast new sums of debt in order to prop up a shrinking money supply.  Their hands are tied by the fact that they can’t (or won’t) create government-issued money.  Instead, their central bank (the People’s Bank of China – PBOC) controls their money supply, exactly like the relationship between our Federal Reserve and Federal government.

China has a lot of people to keep “satisfied”, or else they run the very real risk of internal strife and civil war.  It is because of this that they finance enough new debt to build entire uninhabited cities, while the US government just wastes their money by “shovel-ready” highway projects and such.

The facts are that China has a desperate need to create real inflation – not the fabrications that have been issued by their media to keep people fooled.  China is a factory nation – nothing more, nothing less.  This means that they need to keep a certain level of “factory utilization” going or they face very real problems.

The major issue with this is that China’s two largest trading partners – Western Europe and the US – aren’t buying as many goods due to the economic downturn from the international bank caused credit freeze.  China needs new trading partners, and they need them soon.  These can’t be just any trading partners.  They have to be nations that have a large enough population base in order to keep China’s factories humming along.  These nations are India and Brazil.

How can China open up their markets to India and Brazil?  What we consider “cheap Chinese junk” is actually very expensive to “emerging” economies.  The only way to open up trade with them would be to make the Chinese currency more affordable for those nations – and this can only occur if China seeks to devalue (“weaken”) its money supply.

What effect would a weakened yuan have on Europe and the US?  It would cause Chinese products to be even less expensive than they currently are.  This would further harm factory production in our nation and would most likely lead to an extensive “trade war”, with a whole host of tariffs being added to goods.

China would be extremely foolish to allow their yuan to strengthen.  It could easily add more deflationary pressure to their economy.  The international bank controlled People’s Bank of China is not about to increase the money supply in China by a large amount.  Therefore, increased currency demand can lead to a reduced overall money supply – causing the Chinese economy to become critically destabilized. 

It can’t happen.  It won’t happen.

The United States is desperate to increase its money supply.  The Federal government is creating new debt as fast as it can in an effort to counterbalance the shrinking money supply caused by the credit freeze.  They will cajole, encourage, and even threaten China to strengthen their currency – to the benefit of the US.  China would be feeding their own economic collapse if they follow that path.

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