Here's how the dollar's value against the Chinese RMB has changed during the two years I have been in China.
Yes, yes, I realize that this is a truncated scale, and that the dollar's value has fallen by around 15% (from 8 RMB/$1 as we arrived to just over 6.8 now) rather than by around 90% as the graph might suggest. Here's the 5-year graph, with similar scale, showing the trend since China switched from a strict peg to a "managed float" three years ago.
And, yes, I realize that the change would have been far more dramatic if China imposed no currency controls at all. I mention the charts for two reasons.
The first involves outraged U.S. denunciations of China's "controlled" and "undervalued" currency. Yes, it is controlled, and that has a distorting effect on China's internal economy -- for chapter and verse, see my Atlantic article "The $1.4 Trillion Question" from earlier this year. And yes, it is undervalued by definition, since the trading pressure is all one way.
But when American politicians talk about currency mis-valuation, they often act as if it's the key to the US-China trade imbalance, which it really isn't. (Argument made, at length, in this other Atlantic article about how the outsourcing economy really works.) They also talk and act as if nothing has changed on the currency front, just like in the days of the fixed peg. Unt-uh! As the charts illustrate, and as I am reminded on each day's trip to the ATM.
That leads to the second point: why I'm always haunting the ATM. Everyone knows which way the dollar is going to move against the RMB. The Chinese government controls how fast the change happens, but not its basic direction.
What do you do, as a mere person, when there is a one-way financial bet? When you know that the dollar you exchange a week from now will be worth less than the one you exchange today? Well, you exchange as many of them today as possible. Which is why we have big stacks like this (in secret and secure locations!) around the house:
The bills shown are 100 RMB notes, the largest denomination of Chinese currency. Each one cost us about $12.50 when we arrived. Now, about $14.60. We need a lot of them because almost everything we pay for, including airplane tickets, we buy in cash.
If you wanted, you could use the situation to demonstrate how an attempt to control economic fundamentals begets the need for more controls. (That is: China's regulators don't want its currency to rise very suddenly, so they limit how much money people can exchange. Because they limit the exchanges, the pent-up imbalances against the dollar increase; because of those pent-up pressures, everyone knows that the dollar will continue to fall; because they know it will fall, they try harder to trade -- thus requiring even more controls. At the grand level, there are limits on how much foreign currency a business or an individual can switch into RMB each year. For us, the practical limit is how much we can take out of an ATM in each 24-hour cycle. The ATMs we use are from China Construction Bank, since their deal with Bank of America allows no-fee withdrawals from our B of A account, versus Citibank with its usurious 2% fee for withdrawals from its own Citi ATMs in China.)
All of this is in accord with basic economic principles. In the Beijing HQ we skip all speculation about principle and just imagine we are Weimar Republic or Argentine hyperinflation-era folk, on a milder scale. Our dollars earn very little interest sitting in an account at home, and they can earn 7 or 8 percent a year just by being traded into RMB. Tomorrow I'll exchange some more, before they become worth even less.
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