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The Currency Debate

I am getting quite confused by the currency manipulation discussion surround the Chinese RMB.  Today, Nobel Laureate Krugman came up with this piece in the NY Times. 

I read it once, twice, thrice.  But I think I am missing his point still.  Here’s where I think his logic lies.  Exchange rate is determined by supply and demand of currencies, which in turn, should be determined by import/export balance (either capital or goods).  It is a mechanism which should, in theory, make massive trade imbalances unsustainable.  In theory, since this assumes free trade between all countries. Since the RMB is pegged against the USD, its value appreciates or depreciates with the USD.   At the moment, the RMB is pegged at a lower rate than what it will be at, if traded freely (that’s the assumption, I have no idea). 

I get all that.  What I don’t quite get is how the peg is considered to be currency manipulation when pumping USD into the marketplace is considered not.  When our Fed fixes interest rate at almost zero, requiring our treasury to issue bonds and purchasing them back…   the result is massive pumping and devaluation of the currency.  Yes, the USD is determined by supply and demand, but when we can create the supply and demand ourselves, how is that not manipulation? 

My simple conclusion here is that we are trying to manipulate our currency, but the Chinese are getting in our way since they have their own manipulation mechanism.

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The Rio Tinto Debacle

There is something about the Rio Tinto case that has been bothering me.   Perhaps it is because I cannot quite form an opinion on it – one one hand, I am appalled by the due process of the legal proceedings.  Where the accused employees were held without charge for 5 weeks, and without right to consult a lawyer for even longer.  On the other hand, from what I have read, this is in accordance with the local Chinese law.  So we can’t quite challenge the proper execution of a law, can we? 

In one of my previous posts, I talked about gray areas in Chinese business laws.  I might have misused the word “gray area”.  The better phrase may be the selective enforcement of laws.  An example in the US is jaywalking.  In NYC, jaywalking is illegal and and you’re subject to a fine.  Everybody does it anyways.  Imagine you are amony 20 jaywalkers at a junction and a policeman pointed at you and gave you a fine.  Just you and nobody else.  Tough luck – you did break the law!

It is naive to think that one can do successfully do (big) business in China without some form of bribery or corruption.  Or what in the US might be labeled lobbying instead. 

What makes me uncomfortable in the RioTinto case is that the employees seem to be caught in the middle.  Australia, China and certainly RioTinto all wish to treat this as a case against individuals.  It lets all parties save face in the process and allows business to go on as usual.  I know some of you will tell me that stealing competitive secrets and bribery is illegal and will be prosecuted in most developed country also.  Which is why I am not sure what to think of this.  Maybe you can enlighten me here.

p.s. Another reason this makes me feel uneasy is because this is analogous to a tactic often used within the Chinese political system to remove political threats.  Once in a while, high level political officials will be prosecuted for corruption and either executed or sent to a zillion years in hard labor. 

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Refreshing sometimes to read coverage from non-US media. 

Financial Times:
Inflation risk forces China to act on currency
Tibet: The first foreign media reports
China will not be cowed
The Olympic threat to China

Asia Times:
Power crisis for Guangdong industry
Tibet, China and the West: Back to Stereotypes
Stumbling towards Confucius-ville

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