Social Upheaval Threatens

From Bloomberg:

Wen Says 20% Gain in Yuan Would Cause Social Upheaval

Chinese Premier Wen Jiabao said a 20 percent rise in the yuan would cause severe job losses and trigger social instability, putting the nation on course for a clash with U.S. lawmakers demanding a stronger currency.

We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside” should China acquiesce to demands for a 20 percent to 40 percent gain, Wen said in New York yesterday. “China would suffer major social upheaval.”

The yuan has appreciated about 2 percent against the dollar since June 19, when the central bank said it would pursue a more flexible exchange rate after keeping the currency at about 6.83 versus the U.S. currency for almost two years. The yuan gained 0.1 percent to 6.7079 per dollar on Sept. 21, the strongest level since the central bank unified official and market exchange rates at the end of 1993.

To make a call for a currency to be revalued in the near term by up to 40 percent is something that only someone who isn’t familiar with the economics of exchange rates would say,” said Glenn Maguire, a Hong Kong-based economist at Societe Generale SA. “It’s just not that feasible for something like that to happen so quickly.”

With the “U.S. having outsourced all its manufacturing capacity and production to China, the policy response of getting the currency to appreciate dramatically, or put up tariffs, would ultimately mean the welfare loss is more likely to be in the U.S. than China,” Societe Generale’s Maguire said.

China needs to take “very aggressive” measures to adjust its economy, Stephen Roach, chairman of Morgan Stanley Asia, said at the meeting. The country needs to improve social security to reduce excess savings, Roach said. Increased Chinese demand would in turn help U.S. exports and jobs, he said.

The currency fix will not work, despite what you hear from a lot of famous economists and politicians,” Roach said. “It didn’t work for Japan in the late 1980s. It didn’t work for the U.S. when the dollar fell 23 percent on a trade-weighted basis since early 2002.”


More stupid ideas from our politicians who are getting desperate as poll numbers show support is collapsing.

How foolish are the solutions proposed?

Consider this letter quoted from "Breakfast with Dave" (Rosenberg),

You pointed out that FDR worked out the WPA at lunch one day and put Americans to work, paying them to build the Golden Gate Bridge, while Obama is mailing Americans 99 weeks of unemployment checks - the modern soup line. Well, it's worse than that. Think about it: FDR borrowed that money, mostly from Americans, and sent it to American workers who bought American goods. Today Obama is borrowing money from China and sending it to Americans entitled for 99 weeks of no-work-pay, I mean unemployment insurance, and the are taking it over to Wal-Mart and sending it to Chinese workers. Go figure.....

So how about that idea about starting a trade war with China over its currency.

Pretty smart!!

A much better idea than, say, repairing Americas decaying power grid, or investing in wind and solar energy to reduce dependency on Middle Eastern oil. 


  1. Michael Pettis has a very interesting take on China, basically, Chinese SOE are the engine of growth, and have for the past 2-3 years, they get all the credit they need a very low prices.

    However, these companies don't generate profits, the operate at or slightly below break even. A re-valuation of the Yuan, or an increase in interest rate (Consider interest rate at 2% while the GDP growth is in excess of 10%), and inflation in excess of 4%.

    Social stability is far more important to China's leader then any "bitching" by Obama. Virtually all Chinese governments which fell over the past 1,000 years have done so not because of war but social upheaval.


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