Posted by: David Stewart | November 9, 2010

Why Chinese currency policy hurts like crazy – to change!

There is a clear message these days from the West that we have a major storm brewing in the money world.

China intentionally keeps its money cheap. The exchange rate is roughly 7 RMB to the dollar. It has been close to this ever since I started traveling to China in 2001, when it was about 8 to the dollar.

This policy keeps China positioned as a global export powerhouse. By keeping their currency pegged like this, they are guaranteed that it will always be cheaper to have China make your stuff than to make it yourself.

It also means that the Chinese people won’t want to buy imported goods, because they will always be more expensive. So instead of buying Scottish beef or a French airplane or American underwear, it will always be a better value to make it locally in China. So it’s like an instant duty applied to all imports.

The rationale for the policy has been that Chinese industry needs protection, because they are a developing economy. They fear (and it’s probably a rationale fear) that if their currency floats naturally against world currencies that they could have factory closures, layoffs and unrest.

I’m not sure how this is going to play out. The current policy is bad for the world and any change will be bad for China. But one way change would really hurt badly is for the Western traveler to China.

Nearly everything you pay money for in China is cheap. We had a dinner last night with 14 people, a wonderful two hour multi-course Chinese banquet complete with beverages and the like. It cost 1100 RMB or about $11.50 US per person, on the existing exchange rates.

You can stay at a very nice hotel in the center of the hottest cities with tight real estate for well under $100 per night. More basic hotels in slightly smaller cities are a steal.

Don’t get me wrong – I’m not complaining. And you can spend more, a lot more, if you try. A frugal traveler though can get by with much less.

But what happened a couple of years ago when the currency was allowed to float a little? Suddenly travel got much more expensive: my business travel system started complaining like mad that I was violating company policy by staying at the same hotels I always had stayed in with the exact same room plan. No change in the Chinese price, but the exchange rate price was suddenly much higher.

Take an example from Moscow or Bangalore: their currency floats, and hotel rooms are unbelievably expensive.

So here’s pro tip: if you ever wanted to visit China because it’s a major value? Do it now. Don’t wait. In future, it will be a lot more expensive.


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