Monday, July 04, 2005

Let China be China

Larry Kudlow says not to mess with China's currency.

By keeping its yuan pegged to the dollar, China chooses to import our monetary system. Over the past ten years this arrangement has generated 10 percent growth and low inflation in China, while creating more jobs and higher living standards for hundreds of millions of heretofore impoverished Chinese.
As China does not yet have a proper banking system or a reliably independent currency, it has had to pay dearly to import our monetary system and currency: The Chinese have purchased $230 billion of U.S. Treasuries as the price of renting dollarization. In return, we have “outsourced Alan Greenspan” to manage their economy, to paraphrase Laffer.
Many nations in the Pacific Rim, the Caribbean, and South America have dollarized in order to pursue pro-growth and free-trade relations with the U.S. It’s worked in these nations just as it has in China. It’s a win-win. While China gets a growth boost, tens of millions of Americans get to purchase quality goods at low prices. If the yuan were revalued by 27.5 percent, American consumers could face a shocking inflation wave of roughly the same 27.5 percent.


Interesting. And Kudlow uses the United States -- all fifty of 'em -- to illustrate a successful free-trade system with (in a sense) pegged currency.

1 comment:

Anonymous said...

The problem with China is not that its currency is peggged. The problem is that China is buying our debt and thus buying us out from underneath.

There's no better long-term ownership plan.