Change Afoot?

In 2005 China allowed the yuan to float in the market to some degree. In that time the yuan has appreciated 21% vs. the dollar. This appreciation makes China's goods more expensive and ours more competitive.

The situation may change as the central bank is feeling the pinch of having bought $1 trillion of our government bonds since 2001. That's a big number and, measured against a capital base of $3.2 billion, a really big number. To really make matters worse, their investment in our bonds ($350 billion in Fannie and Freddie) has not produced exactly stellar results. The central bank has been able to do this largely because they obtain very cheap money from Chinese commercial banks, who, in turn, take it out of the hide of the Chinese bank customers by paying them peanuts for interest on their accounts but charging high rates for loans. As you would expect, some Chinese do not like such a situation. One of the best-selling books in China recently has advocated the thesis that we suckered China into poor investments.

The Chinese economy is such that the central bank is not in trouble as they can get money from other branches of the government. The real issue is what will happen to the yuan, as this effects global economies.