China money move: Beijing addresses a glaring weakness
China money: The yuan will now be worth more against the dollar, boosting Chinese consumers' buying power.
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A June 7 article in the Financial Times highlights some of these massive undertakings, the largest of which is a plan to build nearly 30,000 miles of new railway lines by 2020. The price tag for this project alone is expected to exceed half a trillion dollars.Skip to next paragraph
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This begs the question: Why, if the economy is indeed growing as advertised, does the government find it necessary to continue to spend so heavily?
The answer is as basic as it gets. China is forced to increase spending in an attempt to bridge the gap arising from declining export sales, says Yu Yongding, economics professor at the Chinese Academy of Social Sciences and former adviser to the Bank of China.
"China's investment-driven and export-led growth pattern is not sustainable,” Professor Yu told a meeting of Australian officials in Melbourne last November. As a former insider, privy to information not readily or freely available to the public, he points to government infrastructure spending, which consistently totals about 50 percent of the country’s gross domestic product, as evidence of a fiscal policy that cannot continue indefinitely.
Before the recession, demand for China’s exports increased year after year, and this helped camouflage the nation’s fundamental shortcomings.
China’s announcement this week that it will end its practice of fixing, or “pegging,” the yuan to the US dollar, sends a clear signal that China recognizes the importance of its own domestic market.
The yuan will almost certainly appreciate in value, which means China’s exports will cost more for foreign customers. This will likely result in weaker international sales for goods produced in China. However, consumer buying power for Chinese consumers will actually strengthen, and should boost demand for consumer goods in what is easily the largest, yet mostly untapped, consumer market on the planet.
This could be exactly what is needed to address the concerns of China’s critics. But it’s a long-term move. While the yuan will no longer move in lock-step with the dollar, it will still be closely tied to a “basket” of currencies, weighted heavily with the dollar and the euro.
China’s rebalancing will take years.