chinese american economics II

during this year's China trip, Jingping and I had a few discussions re the issue of $-元 exchange rate, and I noticed a few more points.

so, the Chinese state controls the international value of the RMB, for reasons including the cycle explained in that previous post. i didn't state there that there's a special factor making that cycle necessary, factor being that exchanges are only possible through government-controlled agencies (i.e. Chinese banks, which are all state-run). the Chinese state is slowly allowing the value of the RMB to appreciate, by a few percent a year over the past few years, because they recognize that the power of the Chinese economy has outstripped the exchange rate.

in other words, Chinese labor and land - i.e. export - is no longer as cheap and plentiful for foreigners as it used to be, and foreign labor and land - i.e. import - is no longer obviously prohibitively expensive. the Chinese don't want to damage their export system, and they don't want to get overwhelmed with a whole new system of imports, so they're making the RMB adjustment very, very slowly.

this isn't what I noticed, though. this trip, the topic of American investment kept coming up, especially in the context of wealthy Chinese sending their high school or college age children to study in the US. this must be barely affordable even for the upper-middle-class Chinese that are doing it, because private schools in the US are expensive even for Americans. the skewed exchange rate makes it even more expensive, probably by a factor of 2 or more.

on top of this, Jingping's parents gave us a good amount of money to use for her optometry school bills; this is money that they otherwise would have lent to people in China for a small return. they recognized that Jingping taking a large US loan ("financial aid") and paying a large amount of interest would be more costly than giving her the money and thereby giving up their Chinese interest. but, it's still a loss this way, because simply by moving the cash to the US and waiting any meaningful interval of time, the value of the money will decrease.

you can think about this more generally, and in bigger numbers. moderately wealthy Chinese, i.e. those just above Jingping's parents, have enough to invest in their child's education, accepting the exchange rate loss because, well, it's their child. but for the very wealthy - which in China often means state officials, investment abroad means business interests. wealthy Chinese own property abroad, have money in foreign accounts which they use to do international business. they do this because of the operational freedom it gives them, and because their profit margins must be larger than the decline in value of the foreign currencies (i.e. $$) they're using.

but if the drop were too fast... the foreign calculations wouldn't change, and business might actually pick up a bit if it had any connection to markets that were now becoming available to Chinese spending. but for the wealthy Chinese controlling those businesses, their domestic profits could drop precipitously. they might even lose money in the short term.

so, it's not just about protection of the Chinese export economy, or protection against foreign export economies; it's also about protection of domestic profits from profits on foreign investments.