Buying debt to keep currency artificially low

[Qacer]

I heard on the radio that China is keeping their currency artificially low by buying US debt. How does that work? Is there another way of explaining this to a layman?

 

[halik]

To buy us debt, you need us dollars. China has yuan, which means they have to sell yuan (increase supply, decrease value) and buy dollars.

 

[kranky]

As I understand it, the concept works like this: China wants to keep the yuan low with respect to the US dollar. If the value of the dollar drops compared to the yuan, China buys more (= buying our debt) which props up the dollar's value. Keeping the yuan cheap vs. the dollar, makes China's exports cheap for us.

 

[IceBergSLiM]

As I understand it, the concept works like this: China wants to keep the yuan low with respect to the US dollar. If the value of the dollar drops compared to the yuan, China buys more (= buying our debt) which props up the dollar's value. Keeping the yuan cheap vs. the dollar, makes China's exports cheap for us.

They are cheating and their bubble will burst?

 

[dullard]

They are cheating and their bubble will burst?

They aren't cheating in my opinion. But China's bubble will burst in the next 5 years. The biggest portion of their growing economy is building buildings. The problem is they are building empty unused buildings. The central government is forcing local governments to force local banks to lend money for projects that have no end-users, no sense of profit, and no ability to pay back the loans.

China will go through the building bust that we did 4 years ago. It won't be pretty for them, or us. Their banks will fail. Their local governments will fail. The Chinese central government will have to sell most of the US treasuries to bail them out. Our interest rates will skyrocket. But, at least raw materials will be cheap again.

 

[GotIssues]

They aren't cheating in my opinion. But China's bubble will burst in the next 5 years. The biggest portion of their growing economy is building buildings. The problem is they are building empty unused buildings. The central government is forcing local governments to force local banks to lend money for projects that have no end-users, no sense of profit, and no ability to pay back the loans.

China will go through the building bust that we did 4 years ago. It won't be pretty for them, or us. Their banks will fail. Their local governments will fail. The Chinese central government will have to sell most of the US treasuries to bail them out. Our interest rates will skyrocket. But, at least raw materials will be cheap again.

I read somewhere (credible) that 49% of China's GDP is infrastructure, which is a ridiculous amount (US I think is in the range of 25%-30%) and they are propping up their growth numbers with building for the sake of building. The problem with infrastructure is that you can only build so much that actually adds value.

It's funny, because 3/4 of the people here seem to think China is going to continue their growth rate from the past 30 years going forward into the next 30 years - when in actuality, a growing amount of their GDP growth is essentially building a house of cards.

I'm not sure the macro effects their probable troubles will have, but it certainly won't be good.

 

[her209]

To buy us debt, you need us dollars. China has yuan, which means they have to sell yuan (increase supply, decrease value) and buy dollars.

Sell yuan? You mean they print up more yuans. Then convert it to US dollars.

 

[LegendKiller]

I was just reading a NYT article on this. The more vocal Chinese are complaining that they are "bailing out" the US and that their future shouldn't be beholden to the US' spending issues.

That's what an ignorant Chinese sounds like. Ours sounds like a guy going to Wal Mart and complaining of all of the Chinese made junk that steals our jobs, but he buys the stuff anyway.

Neither realizes that the root of the problem is China's manipulation. I do see it as cheating, but cheating that our own "capitalists" allow them to do for greater profit.

 

[JS80]

Sell yuan? You mean they print up more yuans. Then convert it to US dollars.

Convert to US dollars = sell yuan

 

[Saint Nick]

Does anyone in this thread know what they're talking about?

 

[IceBergSLiM]

Does anyone in this thread know what they're talking about?

I do.

 

[LegendKiller]

Does anyone in this thread know what they're talking about?

I do. It's not like only IT guys come here.

 

[halik]

Does anyone in this thread know what they're talking about?

I don't. Not even a little bit.

 

[superccs]

I like how Chinese get owned on the internet and have small wenis. Building buildings to compensate are we Mao?

 

[allthatisman]

Does anyone in this thread know what they're talking about?

All I know is that it takes Yuan to know Yuan...

 

[JS80]

Does anyone in this thread know what they're talking about?

LK, halik, me. In that order.

 

[Blackjack200]

Didn't someone post a thread about the largest shopping mall in the world that was built in China and is almost completely empty? It's like something out of bioshock.

 

[Phokus]

They aren't cheating in my opinion. But China's bubble will burst in the next 5 years. The biggest portion of their growing economy is building buildings. The problem is they are building empty unused buildings. The central government is forcing local governments to force local banks to lend money for projects that have no end-users, no sense of profit, and no ability to pay back the loans.

China will go through the building bust that we did 4 years ago. It won't be pretty for them, or us. Their banks will fail. Their local governments will fail. The Chinese central government will have to sell most of the US treasuries to bail them out. Our interest rates will skyrocket. But, at least raw materials will be cheap again.

I don't think China does mortgages like the US does though, i coulda sworn they buy housing with cash. So it would wipe out equity, but not be a debt bubble.

 

[dawks]

To buy us debt, you need us dollars. China has yuan, which means they have to sell yuan (increase supply, decrease value) and buy dollars.

They are experiencing problems with Inflation, and this is part of whats driving their inflation. They keep trying to restrain inflation by increasing interest rates, but that wont work if they keep 'printing' money and selling yuan. If China really wants to stem inflation they need to raise the value of their currency, relative to the US dollar, or ideally let it float.

 

[JS80]

They are experiencing problems with Inflation, and this is part of whats driving their inflation. They keep trying to restrain inflation by increasing interest rates, but that wont work if they keep 'printing' money and selling yuan. If China really wants to stem inflation they need to raise the value of their currency, relative to the US dollar, or ideally let it float.

Which would put them into a great recession and there would be mass unemployment. They are in a catch-22.

 

[dullard]

I don't think China does mortgages like the US does though, i coulda sworn they buy housing with cash. So it would wipe out equity, but not be a debt bubble.

I was speaking more of commercial buildings. You are correct that mortgages in China are rare. But loans are used for commercial and infrastructure projects.

The biggest effect would be a major chunk of China's GDP just vanishes when they stop the over-building. When we stopped our over-building, we lost about 5% of GDP (and that is a long term drop until the housing bubble works its way through). With China, it'll be far, far bigger than 5% lost. It'll mean lost GDP, lost jobs, possibly a mass movement back to the country, etc. Those together will reinforce their economic pain in a nasty spiral.

If there is a mass movement back to the country, then housing values will fall. That isn't as much of a problem as our lost housing values (which were being used to feed 7% of GDP by borrowing on our equity, another long-term loss we will face for years). But, they'll be spending less and producing far less.

I really don't see a way out for China. They can keep things going "well" for a few more years artificially. But, it'll crash and it'll crash hard.

 

[metalfacepc]

For the most part, policy makers control the value of currency. I understand the part about printing more yuan (increasing supply) to buy US debt ( and thus keep their currency artificially low). Where do interest rates come into play? Because I know interest rates also play a part in the value of currency

 

[JTsyo]

I wonder if their population control is hurting them. with a steady population growth yo can sustain economical growth. It's not like there are going to be too many that want to move to China either.