This episode of CNBC Squawk Box took place on April 26, 2005. In it, Peter Schiff discusses the implications of China delinking the RMB (yuan) to the USD.
One of the memorable quotes from one of the commentators:
Let’s get back to China for one second [...] it would seem to me that if ultimately they delinked their currency to ours and if the dollar continues to plummet, they’re not going to be able to sell nearly as much stuff to us.
The People’s Bank of China broke the RMB peg three months later in July of 2005. How has it performed?
The chart shows the tail end of the 8.2765 yuan peg. Yesterday, the market closed at 6.8750 RMB/USD. Or as seen in the inverted ratio, .1208 to .1455.
Thus over the past three years, the RMB has appreciated 20% relative to the USD.
Why has this occurred? While the yuan is still not freely floating, it shows every sign that it has been artificially devalued/underappreciated for years. Despite the fact that the PBoC is not transparent in its monetary actions, according to the FOREX market the US Fed has still managed to substantially out-inflate the PBoC.
To answer the commentator’s question: because of the decline in USD value it will cost more for Americans to buy the same widget. However, this does not hurt the Chinese exporter as the big loser in this situation is anyone with dollar denominated assets.
The questions that should now be discussed are: how do exchange rates arise and what are the consequences of a stronger RMB?
I think Peter and others have sufficiently answered those on multiple occasions. Here is a recent interview with Peter Schiff as well as an interview with Joseph Salerno.
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Something troubles me with the mercantilist view. Sure the RMB has been kept weaker than it would otherwise have been but presumably this has been at least somewhat offset by higher than otherwise domestic price inflation, so an American may have to hand over less dollars per RMB but he has to pay more RMB per good than without currency intervention. So now we have seen RMB appreciate, we may well see lower domestic RMB price inflation than otherwise. i.e. is it clear that a policy of keeping a currency too cheap actually ends up keeping the cost of the goods sold in dollar terms lower than they would otherwise have been?
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