Warren's Wisdoms-The Yuan and You (& me) 8/23/2005
About 1.3 Billion people call China home and their currency, the Yuan, has recently been allowed to float in value vs. our dollar. Right now, we expect that the Yuan will rise somewhat, meaning it will take more dollars to buy a Yuan, or more dollars to buy something priced in Yuan.
More and more, we are living in a global economy. The very cool computer program Google Earth allows us to zoom in on any part of the world and take a peek at it from 3500 feet. Looking in on any part of the country of Australia shows you a place where the US dollar is very strong and where you can go on vacation and get bargain prices on local items. On the other hand, looking in on any part of the country of China shows you a place where the strong US dollar will still buy plenty of stuff but where, over the next several months, we expect that it will begin to buy a little less.
We commented several months ago on the weakness of the dollar vs. several other global currencies and suggested that it would naturally re-value itself over time. This has been happening and the US dollar is now stronger than it was. However, these relationships are never completely stable, as the Yuan de-coupling shows.
Following the Bretton Woods conference following WW II, governments have tried to stabilize the value of their currencies in relation to each other but since 1971 when the US moved away from the gold standard, valuations have become more fungible.
Several communities in the US have resisted the arrival of Wal-Mart stores, saying they are anti-competitive to local businesses. An avowed capitalist, I must disagree. Their stores are certainly hazardous to the health of poorly-run competitors but their arrival in a community almost always brings prices down for everyone � lowering the cost of living in that community. An efficient global marketplace will tend to locate sources of supply in areas where prices are lowest � tech support from India, toys from China, garments from Sri Lanka, technology from the USA.
Our country seems to be enjoying a return to the Goldilocks economy of the mid to late 90s, with jobs returning but inflation at bay. The emergence of China as a supplier � especially to Wal-Mart � has helped this happen and a stronger Yuan will tend to diminish the effect. Interestingly, though, while a stronger currency will allow the Chinese to buy more items with their currency, it will also make Chinese manufacturers less competitive which is certainly not the aim of the Chinese government.
This is in no way a matter of national pride (�my currency�s stronger than yours�) but more a matter of the constant, tiny, corrections to the relationships between currencies due to the strength of the underlying economies. Our guess is that this re-valuation will have little or no effect on ours.
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