China recently stated that they had too many dollars, and were looking to diversify. China has over half a trillion dollars, and if they start selling them, the dollar will drop. The announcement alone caused the dollar to drop in value.

If the dollar drops in value, China will get less from selling them. It doesn't make sense for China to announce something that will make the dollar drop. They should instead quietly sell dollars.

So why did they announce it? My theory is that they want the dollar to drop but are not intending to sell dollars for a few months, during which the dollar will recover.

If the dollar drops in value, it will take more dollars to buy things from China. Normally, that would mean that fewer goods would be bought. However, it's Christmas shopping season right now, and parents are going to buy toys for their kids no matter what. Furthermore, they're shopping around. That means retail stores (and online stores) have to keep prices low—they can't raise them to reflect the lower value of the dollar (and thus increased cost of goods). With prices staying low and Christmas coming up in a few weeks, demand will remain high.

Since the amount of goods bought will stay the same, the cost paid by retailers has gone up, and the price paid by consumers has stayed the same, the big winner in all of this is China, and the losers are the retailers. A portion of their profits will go to currency exchange. If I were playing the stock market, I'd short the retailers that sell lots of goods from China.

If I were in charge of the Chinese currency, I'd make some announcement right after Thanksgiving about my wanting to get rid of dollars, but I wouldn't actually sell any dollars. That way I can get even more dollars from all the Christmas shoppers than I normally would have. A few months later I'd quietly sell dollars. I certainly wouldn't announce that I'm going to sell dollars right before I sell them. That'd be dumb.


Anonymous wrote at Wednesday, November 29, 2006 at 5:46:00 PM PST

I disagree that the Chinese want the Dollar to drop, something that would make the cost of Chinese goods higher relative to the dollar, and here is why the Chinese don't want the Dollar to continue to drop. When Chinese goods have become more expensive to the American Market it's consumers, there is some point where those marginal Dollar's once committed to Chinese goods become Dollar's decreasingly committed to Chinese goods and increasingly committed to shopping for 'Other' Non-Chinese goods because consumer's believe they are paying too much. So, there is risk that Chinese inventories will rise, if greenback deflation continues. I look for the fed to allow the Dollar to continue along it's current path, the Chinese have had numerous opportunities to float the yuan on the open market, apparentlythey believe that is not deemed to be in their self-interest, we will see.

Anonymous wrote at Wednesday, November 29, 2006 at 6:17:00 PM PST

Amit, wouldn't it be reasonable to suppose that raw materials for the Christmas season were purchased by the Chinese weeks if not months ago on the commodities market? The Chinese have fixed labor costs as well, so there is no variation or increase in labor to build toy's. The only thing left for the Chinese to determine would be how they choose to account for the process, and I am uncertain about their rules fo accounting. The actual cost to produce the toys, was determined in the the past because the Chinese have already paid for the raw material commodities, and labor is constant. . . I think you are referring to an internal accounting matter when you speak of the Christmas season upcoming, because everything is already determined except by how many to relieve inventory by at the end of this upcoming Christmas season, and what the profit margin will be dependant upon how they decide to reflect cost of goods.

Amit wrote at Wednesday, November 29, 2006 at 6:42:00 PM PST

Henotter, I agree that the Chinese would not want to have the dollar drop, except that during Christmas I think there won't be much affect on demand because people feel that they have to buy things. (At other times of year people are willing to not buy.)

As far as the costs going up, I do not mean the cost of labor or raw materials, but only the cost after currency exchange. The dollar dropping means the Chinese goods cost most for U.S. retailers to buy, so Chinese companies receive more dollars than they would have if the dollar had not dropped.

Anonymous wrote at Wednesday, November 29, 2006 at 8:37:00 PM PST

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