Why are Saudi Arabia and other Gulf countries urged to keep their currencies pegged to the U.S. dollar while China is chided for being too slow in abandoning their managed peg?
In early June Secretary of the Treasury Paulson visited several Gulf countries:
U.S. Treasury Secretary Henry Paulson and Saudi Arabian Finance Minister Ibrahim Al-Assaf agreed that the Gulf kingdom benefits from keeping its currency pegged to the dollar.
The riyal’s peg "has served this country and the region well," Paulson said today at a joint press conference in Jeddah. "I totally agree with Secretary Paulson," al-Assaf said. "As we have said many times, we have no intention of de- pegging or of revaluation."
Paulson is getting an update on the fixed exchange rates retained by most oil-rich nations in the Middle East on his four-day trip to the region.
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Any change to currency regimes in the region "is a sovereign decision," Paulson said.
But just a few days later Paulson says this:
Despite rising nearly 20 pct against the dollar in the last 3 years, China’s yuan needs to appreciate even more — and even more quickly — if China is going to successfully deal with its growing economic imbalances, Treasury Secretary Henry Paulson said Tuesday.
So the Gulf shall stick to it the dollar and China shall not. Does this make any sense?
It can not be the trade deficit that is Paulson’s problem here. That again increased last month against both, the Gulf states and China.
Both, the Gulf countries and China, have exactly the same monetary characteristic versus the U.S.
They export their goods to the U.S. and recycle the dollars they get by buying treasuries and other U.S. assets. In both cases it is a vendor financed deal that will stop when the vendor owns all the assets the buyer has. The U.S. people put themselves up for a garage sale.
The Gulf and China both have trouble with this as the scheme increases local inflation into the 10-20% range. Wal Mart pays a Chinese company in dollars. The company goes to Chinas central bank and exchanges the dollars for freshly created yuans to pay its workers. The increased yuan money supply heats Chinese local inflation. The same mechanism applies in the Gulf countries.
So why does Paulson think that a peg is good for the Gulf and bad for China?