Thursday, January 20, 2011

China devalues US buying power by 30%, Protects US Treasury Holdings

The trade imbalance between the US and China, a hot button between the nations for the last decade or so, is finally going to start to stabilize in the summer of 2011.  However, it is doing so with a de facto devaluation of the US dollar and its buying power.  The average American will see a spike in the price of everything from their favorite jeans and T-shirts, to the cost of some electronics.

The Chinese have decided to devalue the US dollar’s buying power, without devaluing the US Treasury holdings they hold.  It is an elegant solution to their issues.  It will be interesting to see if they can pull it off, while they try to prop up the European Sovereign debt markets at the same time.

The Chinese are attempting, successfully so far, to introduce the Yuan as a global currency in which to settle international trade.  China is pumping into its own internal currency markets so much liquidity, they need an export market to develop for the Yuan or their own internal markets will overheat.

So China is going to start offering Yuan based savings accounts, to westerners as a vehicle in which to park capital.  While this is a test case only, one might expect Yuan based accounts to be offered around the world sooner rather than later.

If western investors take to Yuan based cash accounts as a way to try and gain an increase in value, the transition will drive the western banks to be more proactive in adding convertibility into their systems.  To start, they are offering these Yuan accounts at three US based branches.

The US Dollar devaluation will come in the form of an increase in the prices of all products.  In reality it will represent the uniform cost push effects of inflation.  The US can expect it on all Chinese based products of one form or another.  The timing of the change is set to arrive with the products on the US shores in the summer of 2011.
“They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”
China has no choice at this stage, but to pass on the cost of raw inflation to its customers.  The era of cheap Chinese imports is over.  The real impacts of higher commodity costs are going to push into the economy at different levels.  Newstory continues here.  (


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