From: ldong@hila.hut.fi (Liyun Dong)
Subject: Re: Another way to calculate economic strength
Organization: Helsinki University of Technology, Finland
Date: Wed, 22 Jul 1992 07:46:59 GMT

In article <76219@ut-emx.uucp> joe@astro.as.utexas.edu (Joe Wang) writes:
>In article <1992Jul19.014851.19339@ulowell.ulowell.edu> cshi@cs.ulowell.edu (Chunde Shi) writes:
>>1. monetary policy of China and other nations with regard to CHina's currency
>>Should China make her currency international acceptable? Caution! It requires
>>all othere nations cooperation to recognize Chinese currency in their nation.
>
>No it doesn't.  The reason Chinese currency is not convertable is that
>the PRC makes it illegal to take RMB out of the country.  If the PRC
>got rid of this obstacle, then currency traders would take RMB and
>start exchanging on international currency markets.
	Agree. Many people think RMB is not convertable because the lack of
	international recognition. This is a common wrong concept. It is PRC
	not any other nation which prevent the flow of RMB out of China.
>
>If the RMB was made freely convertible then the exchange rate would
>still probably be around 6-7RMB to US$1.  Because you can buy more
>hi-tech stuff with dollars than you can with RMB so people still will
>pay a lot of RMB for US$1.
>
	
>>Otherwise, Chinese currency will be worthless. Look what happened in Russia,
>>when made free ruble exchange, other nation refused to recognize.
>
>The problem with rubles isn't recognition.  The problem is that you
>can't buy much with rubles even in Russia.  The economy there is in
>very, very bad shape and no one trusts the ruble so even people in
>Russia prefer dollars over rubles.  The result of this is that no one
>wants rubles and the exchange rate is something like 100 Rubles =
>US$1.
>
>>Chinese Currency exchange rate against foreign currency, for example US 
>>dollars is 5.5:1 dollar. If we get rid of the factors in second group, the 
>>exchange rate should be 0.5:1dollars. 
>
>On the other hand, if you raise the exchange rate to 0.5 RMB = US$1,
>then Chinese labor becomes very, very expensive and then Chinese
>products become less attractive.
	The RMB can be upvalued as long as the trade surplus exists.
>
>>To inprove majority of Chinese people inside China's
>>living standard, China should do what she is doing--improve efficency and 
>>technological advance and industrialization.
>
>This I agree with.
>
>>Importantly, use inflation to put more money into economy and maitain the
>>same exchange rate for Chinese currency.(there are dangers involve this).
>
>I don't understand this.  Suppose you print a lot of RMB.  Now if the
>U.S. government doesn't decide to print more dollars.  You have more
>RMB, same amount of dollars.  This means that people will pay more RMB
>for US$1.

The point is that USA is always printing Dollars in a fast speed. Look at the 
present interest rate in USA: about 3-4 per cent. It means the printing
machine in Federal Reserves is running madly. The secret why the inflation in
the USA is still moderate is the entire world is suply products to USA to
earn the Dollars printed by US machine. 
>
>If you do what the U.S. was forced to do in the 1970's and artifically
>keep the exchange rate fixed, they you will mess up the Chinese
>economy.  Suppose China makes a product for 6RMB.  This widget costs
>US$1.  Now because of imflation the product now costs 12RMB.  But
>because the exchange rate is fixed, an American will have to pay US$2.
>This means that Chinese products will get more expensive in the U.S.
>and people will stop buying Chinese things.  This will hurt the export
>based industries and it means less foreign exchange available.
>
>BUT IT GETS WORSE!!!!!!
>
>Also, if the RMB is freely convertable, you have even more problems if
>you pursue inflation and a fixed exchange rate.  Suppose I have 6RMB.
>Before, that was worth $1.  Suppose prices in the PRC double.  That
>6RMB is now "really" worth US$0.50.  But the PRC wants to keep the
>exchange rate to be 6RMB=US$1.  No one is willing to exchange RMB at
>this rate.  The only way you can get this to happen is if the People's
>Bank of China starts buying up RMB at this artifically price.  This
>depletes your foreign exchange reserve VERY QUICKLY since you are the
>only one buying RMB and selling US$.  Between 1973 and 1975, central
>banks tried to play games like this with the exchange rate, they found
>that they quickly ran out of money.  Generally central banks no longer
>do this.
>
>BUT IT GETS EVEN WORSE!!!!!!
>
>I'm a Chinese businessman who has saved a lot of RMB.  Suddenly there
>is inflation and the government is trying to keep the exchange rate
>constant.  I think do myself, if I keep my money in RMB I will lose
>value, but if I keep my money in dollars, I won't so I will sell my
>RMB and buy dollars.  The problem is that EVERYONE is thinking the
>same thing, and suddenly EVERYONE wants to buy dollars and sell RMB.
>This means that the People's Bank of China (who is the only one
>selling dollars and buying RMB) is paying out all its dollars, and a
>lot of money which had been invested in PRC with RMB are now invested
>in U.S. with dollars.  Eventually, the Bank of China runs out of
>dollars to buy RMB.  Because EVERYONE is now trying to sell RMB and
>to buy dollars, the RMB becomes worthless. 
>
>In summary, if you pursue inflation and keep exchange rates stable
>
>1. no one will buy your products
>2. your central bank will run out of foreign exchange
>3. capital invested in your country will go overseas
>4. when your central bank finally runs out of foreign exchange, your
>   currency will be worthless
>
>All of this actually happened to Mexico in 1981, and ruined their
>economy for a few years.
	very good analysis. but all based on the assumption of convertable
	currency plus fixed exchange rate. 
	What about convertability plus floating rate?
	Now is 6Yuan to 1 $, 
	You don't trust RMB ? You want to sell it? OK, 7 Yuan one dollar.
	You still want to sell it? What about 8 Yuan a dollar?

>
>>To 
>>increase GNP per capita, both actual growth of Economy, and inflation should
>>be used. let say 10% inflation rate and 5% growth in real term. I know people
>>are afraid inflation. 
>
>The problem with inflation is that it discourages saving.  Why save
>your money if inflation is going to eat up the value of your money?
>You need to encourage as much saving as possible so that there is a pool
>of capital available.
>
>>Proper measure can be taken to
>>reduce the bad affect of inflation, for example to adjust pension for retired
>>people, taking into inflation consideration, increase workers salary with
>>inflation consideration.
>
>NO!!!!!!!!!  DON'T DO THIS!!!!!!!!!
>
>Think about what you are doing.  You put a little money into the
>economy which causes a little inflation.  Prices rise.  
>
>Then.....
>1. Workers get upset and you print more money and raise their salaries.  
>2. Because you printed more money, prices rise even more.
>3. Goto 1
>
>You are now in "cost-pull" inflation.  If you don't stop it then.....
>
>1. People get scared of rising prices and they start spending their savings
>2. Because people are spending so much more money, goods become scarce and
>   prices rise
>3. Goto 1
>
>You are now in "demand-push" inflation.  If you don't stop it then you
>will get hyperinflation and you will destroy your economy.
>
>The problem with each of these cycles is that they are EXTREMELY
>PAINFUL to break out of.  In order to break out of the cycle, you have
>to stop people from spending money and this involves throwing your
>economy into a recession.  VERY UNPOPULAR.  
>
>I think the lesson is to keep inflation low in the first place.  If
>you start having high inflation that means that people are spending
>too much money, and you should try to reduce spending (by increasing
>interest rates for example).
>
>Incidentally, the reason why a little inflation is tolerable, is that
>if you are willing to have a little inflation, you can reduce the
>interest rates.  This makes it possible to borrow money more cheaply
>for development.  
>
>You can only get development by industrialization and technology.
>Playing with the money supply won't generally do it.
>
>>Then the only losers will be foreigners, given
>>China's exporting goods are too cheap, a little increas in price will not 
>>affect valume of export.
>
>The losers will be Chinese workers in factories if you set the
>exchange rate too low.  If you make Chinese goods more expensive,
>foreigners will stop buying Chinese goods.  
>
>>P.S.: China had persued industralization policy different from those of 
>>foru tigers. Havy industry and high tech industry first before 80s. Those
>>achievements are still there, and were vital to CHina's national strength.
>
>I disagree.  The state owned factories which were built before the
>1980's are losing money right and left.  Because they never had to
>compete in a market, they are producing goods that few people want.
>
>As for hi-tech.  All of the hi-tech products built before the 1980's
>have limited commerical applications.  The atom bomb and missiles were
>(and still) are useful.  By keeping a few of them around, you can cut
>back on your military spending, and devote more resources to civilian
>areas.
>
>>China has to have her own in order to have real sovereignty.
>[...]
>>But those achievement will take longer time to reflected in individual's
>>living standard.
>
>Really, really bad move on PRC's part.  By cutting itself off from the
>rest of the world, it missed out on technology.
>
>Most of the pre-1980 "achievements" won't be reflected at all in the
>living standard.
>
>>I wish China should put emphasis on space industry research and development. 
>>Because U.S. is  vigorously doing that. 
>
>Probably a good idea.  China should try to develop a cheap heavy lift
>vehicle (perhaps buying techonology from the Russians).  The PRC
>doesn't have too much missile hi-tech, but the problem with most of
>U.S. launchers is that they are too hi-tech and therefore too
>expensive.
>
>>In the new era, who control the space who control the world. 
>
>REALLY REALLY BAD IDEA!!!!!!!!!!!!!!!!!
>
>It's better to agree to demiltarize space so that we have more money
>to spend on Earth.
>
>>China should not
>>persue a full scale race with U.S., but at least keep minimum space defence
>>when U.S. establish space domination, to 
>>protect China from U.S. bully.
>
>Wouldn't be cheaper and better if everyone just agreed to put no
>weapons in space??????
>
>There are too many problems in China to worry about spending money for
>more weapons.
>
>
>
>
	I have some questions. I hope someone can explain it:
	1. How the salary of the Central Bank Staff comes from? Is it just from
	printing machine?
	2. If one dollar flows out of US border, USA gets one dollar worth of 
	goods or services. If one dollar flows into USA, USA offer the world
	with one dollar worth of goods and services. But there are always huge
	amount of dollars wondering around world, probably never come back to
	USA. Does it mean that USA have got same amount of goods and services
	by just printing these dollars?
	3. The world economy is expanding continuesly. The money supply is
	also expanding (usualy more rapidly than economy itself). It semms 
	likely the dollars outside USA will continue to increase. Does it mean
	that USA is still getting huge benefits from this?
	4. If Chinese RMB is fully convertable. Can China share this kind of 
	benefit from the world? Because if RMB is convertable and its rate is
	floating, whatever its rate is, there will be a net flow of RMB out
	of China, whatever how small it is at the beginning.
	


	
	

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