1 USD = 6.79527864 RMB

For the first time in recent years, the RMB went strong and broke the 6.80 threshold. What does it mean to people in China, the States, and other countries?

I am not an economist, and I am lack of basic ideas about how currency exchange impacts the world. Let me explain what I think from an individual who want to think about this issue.

I Forgot the Time when 1 USD is 8.2 RMB

I did some research on Google. Interestingly, the first two search results for RMB to USD brought me back to what I wrote in 2008: 1 USD = 6.9966 RMB. In that entry, I quoted a chart:

Reviewing this chart, I realized that RMB was always at 1 USD = 8.25 RMB level before mid of 2005.

How much has changed in the last five years. The exchange rate floating is normal for most countries, but in China, that is not very common. The exchange rate seems to be fixed by a ratio. Although the government denied the fact that RMB is manipulated, it does not seem to be the case.

Buying More Stuff

The appreciation of RMB obviously bring some benefits to people as a consumer. Goods in US are no longer that expensive.

In my first trip to US in 2000, I was not able to afford anything – including toothbrush in CSV. I still remember when I was shown a bill in the Chinese restaurant, I asked the question without really thinking: “Is it in RMB or USD?” because 10 USD for a meal didn’t seem right to me. I needed to consistently remind myself that the money should be multiplied by 8 for any price, until I get used to it many days later.

These days, when I travel in US, many things appear cheap – even after converting to RMB. There are two factors for it. The first is the exchange ratio. 1 to 8.25 is very different from 1 to 6.8. The second factor is, things back in Shanghai got more and more expensive. When we started to accept the fact that a working lunch can easily cost 25 – 35 RMB in Xujiahui area, a hamburger in the States does not seem that expensive.

Crisis for Manufacturers

Although I believe most people around me who don’t really think about it may be happy because of increasing purchasing power, I worry a lot as the exchange rate can cause huge problem to export oriented business (which is a big part in Chinese economy). When the manufactures like Foxconn was forced to increase the salary, and the price will be less competitive because of the exchange rate, what is the future for the manufacture, and what is the consequence when the plants were closed? That can change the Chinese society in a big way.

Thought about the Future

Anyway, without understanding the situation, I am feeling optimistic (this time, I completely agree I felt that way blindly), because I just believing in changes. With the change, many thing will change, and changes are opportunities. The only thing that does not change is change, including the exchange.

6 thoughts on “1 USD = 6.79527864 RMB

  1. Soon

    JS, the appreciation of RMB will cause further inflation to China and the world. With greater domestic demand means greater world demand because of China sheer population. I agreed that cost of living in China especially big cities like Beijing and Shanghai are very high relative to the western developed countries. When I was in Beijing a rickshaw cab driver said that most westerner are rich and loaded, but I told him, they are made rich by China because China did not allow RMB to appreciate.

    China is financing the US spending by buying more US treasury bonds. Now the dilemma for China is that China is holidng too much US bonds. By dumping the bonds will lower the value of US dollars and thus lower the Chinese foreign reserve. The only way out for China is too buy assets overseas, because diverting US dollars bond to Euro is not a good idea either.

    If China really embrace capitalism it must allow market capitalism and not controlled capitalism. The dilemma China face today because of pseudo capitalism. The only way I see China can neutralise the effect of high RMB and its economic consequence to domestic producer is to spend on building chinese domestic infrastructure and invest more money in green technology and environment protection. China has been in the past sacrifice its environment for the benefit of the consuming world especially the western countries, by financing their spending habits to the tune that now US balloning national debts is threatening the stability of world economy.

    That is my take.

    Cheers

  2. Nick

    The appreciation of the yuan is a bad thing for everyone but foreign governments who need to blame their problems on someone else. Economic problems like in the United States can not be fixed by another country’s currency changes. The USA propaganda has everyone brainwashed! I will explain so you understand in great detail.

    Why does China peg to the dollar. The answer is very simple: social stability. When I first came to China in 1993 no one wanted to even take the RMB. Even in Sichuan stores priced their goods in Hong Kong Dollars. You could get 10 to 1 in the market even though the rate was 8.25 to 1. People saw the dollar as a safe currency so by pegging to the dollar it gave people the feeling of security. Also it greatly simplifies business as the dollar is the world currency.

    Maybe people are not aware but the rmb was pegged to the dollar for decades. No one cared because China was poor now its a problem? Does everyone know Hong Kong has pegged to the dollar why is this not a problem? What you read about China has “purchasing power” and the Chinese government is cheating the other countries with this manipulation? No this is all propanda. The reason is China owns a large amount of debt of other countries and when the yuan appreciates it devalues the debt when its converted back to RMB.

    The other whinning is that China’s trade imbalance is too big. They are stealing jobs from the USA and Europe. I am sorry I am a US citizen but this is the biggest pack of lies. Ask yourself why does China have this large trade surplus. Because US and foreign corporations buy from China and put factories here. No one forced them. Walmart, Apple, Intel just to name a few. Zero jobs will be created in America or anywhere else with this appreciation. Why? Because people in the USA will not work for $1/hr. Do you know why the USA has such a large problem with illegal immigration? Because no one wants to be janitors or crop pickers. Companies in the USA are giving these people jobs or they would not come.

    Second companies like Walmart will not move jobs or “buy American” they will just start buying from Vietnam or South America. So many jobs go to India yet no one has had this large outcry about that. Why? Because India is a democracy.

    There is alot of politics involved and old hatreds here.

    Why is this actually bad for The USA. Because its actually a secret tax on an overtaxed population. As the yuan appreciates it makes everything from China more expensive. USA has already high unemployment. Now these people will need to pay more to buy clothes and other goods when they should not have had to. In fact since the USA has a sales tax so more things cost the more local governments get in tax revenues. Taking more money away from people who already have little to spare.

    Why is this very bad for China. JWS you are not a reflection of China. Only a small percentage of the people travel to the USA. Only 25% of the people in China will really acquire a minimal increase to buy US goods. The fact is the 75% who work in factories like Foxconn will be greatly impacted. Tens of millions of people depend on jobs from export. These companies run a razor thin margin. Now they are getting hit with a double whammy increased salaries and now stronger RMB. Their only choice is to cut costs to make money. That means people will lose their jobs.

    Trying to control inflation by currency manipulation does not work. The only way to control inflation is to address the cause which is too much money chasing too few goods. For this China has only itself to blame. Over lending by banks and pumping the money supply created this real estate bubble and now this crazy price spiral. The governments solution to give everyone a raise will only create another spiral of inflation. In the end people will need a wheel barrel of money to buy something. The only thing the yuan appreciation does is put people out of work which does stop them spending. However it creates social instability.

    Oh but wait what about you can buy stuff cheaper from the USA wont that help? Not really. Because the fact is China is unique. Why? Because everyone for now has to buy things from China because they are cheap. However the Chinese do not have to buy anything from the USA. US goods compete with Japan, Europe and Korea and local companies etc. The fact is the euro has fallen so fast that even the yuan appreciating against the dollar will not make the US competitive vs the euro.

    Also one thing that is forgotten is that as the yuan appreciates it makes having operations in China much more expensive. So those same companies trying to get footholds here will not be helped. Yes they pay their locals in rmb but their expat staff is paid in dollars and they will repatriate earnings in dollars. I live in Shekou Shenzhen its already expensive here but so many businesses rely on expats and tourists to support them. Now they are seeing expats pulled and people cutting back. The exchange rate will only make things worse as no one will pay $12 for a hamburger. It worries me greatly because the USA can be a bully when its serves special interests and that is what this is. Even a 10 percent appreciation will cause problems as I am paid in us dollars.

    I will leave you with this. In the 1980s no one talked about China. It was all Japan. Japan was buying up America. They were cheating with a cheap currency. They were dumping their cheap cars etc etc. The US bullied Japan into appreciating the yen. It drove Japan into a decade plus long recession that they have yet to come out of. This will be China’s future.

    I have a Master’s degree in Economics. This pressure was nothing more than political. Study history. The USA and europe have problems because they have too much debt. Jobs are created when taxes are kept reasonable allowing for innovation and consumer spending. Think about it China is one country and its % of world GDP is small. Do you really think they will fix the global economy by changing their currency 10%. China moved its currency 20% higher and we still went into the worst global recession ever.

    What is sad is that the US government is building propanda of hatred against China. I see it more and more in blogs. People in the United States are quite ignorant about China. They actually believe that China owns like all our debt and takes all our jobs. China’s entire surplus would only cover the USA deficit for like a year and a half. When you look at the facts its really ludicris.

    You may ask if fixing currency was good why does not everyone do it. Actually up till the 1970’s it was that way everything was pegged to gold. However you cant run up large deficits and print money on a gold standard so it was abandoned. Remember China does not “fix” its currency it is just pegged to the US dollar. The dollar moves around quite a bit but because the Bush Administration to help their pals went on a campaign to make the dollar weaker it made the yuan weaker. This is only a phomenon of the past ten years.

    All the bullying of Japan did not save the US auto industry. You still have to make things of quality that people want. For a government that follows John Maynard Keynes economics they disregard his most inportant tenants that economics works best when each country should adhere to what they have a compeitive advantage in. All this manipulation in the global markets will just backfire.

  3. soon

    Hi Nick

    thank you for your enlightening writing above. and i agreed that appreciation of RMB will not save US or EU jobs. Inevitably, RMB will still have to appreciate.

    however I am of the opinion the problem mired in japanese economy today has nothing to do with appreciation of yen. it was decades of excessive political lending and corruption among japanese conglomerates.

    Appreciation of RMB will lift the standard of living of chinese people however with the caveat the government has to control inflation and property bubble without falter.

    despite the doldroms of japanese economy since early 1990, japanese by and large still enjoy a high standard of living thanks to their high saving.

    cheers

  4. ade

    “These days, when I travel in US, many things appear cheap – even after converting to RMB. There are two factors for it”. There is the third factors, that is, you have more money now. :)

  5. Claudia Frias

    to me, working in finance, it was a huge milestone!

    The markets changed abruptly, the gold and silver and the base metals and other commodities adjusted up immediately! And the usd and t.bills seemed a bit weaker due to this.

    Also there was a political impact which lead the g20 and usa specifically to avoid the “manipulator” speech on that reunion, it was made on perfect timing and the question is how much is going to really float? will it? or its just a temporary fact to be reversed and still under CBC ;) hope it really adjusts…

    Time will tell…

  6. Nick

    Sorry I disagree, currency manipulation will not create a better standard of living. Hong Kong has been pegged to the dollar for ever and they have done well. Currency valuation damages exports which hurt Japan in the 80’s and will hurt China. The problem has nothing to do with China’s currency it has to do with the US making the dollar artificially weak to boost its export sector and make mountains of money for the oil companies.

    If you live and do business in China and you are paid in US dollars and translate earnings in US dollars see what happens to those businesses when the value increases ten percent. BTW the rmb already appreciated 20% it had zero impact on the trade imbalance or job creation in the USA. Precious metals are not impacted sorry Claudia.

    Always remember if you can impact reality artificially than everyone would do it. The problem is not the yuan its the crushing debt burdens all these countries have. I live in shen zhen. The yuan appreciating 20% impacted the quality of life zero actually it was negative as no one gave raises because they could not afford it. The minimum wage here is only 1100 rmb after all that.

    Innovation and creating value in the society creates a better life. If you could do so by currency manipulation than zimbabwe would be the strongest country on earth.

    China will succeed if it controls inflation not by putting people out of work but by shrinking the money supply.

Leave a Reply

Your email address will not be published. Required fields are marked *