Systems Mapping of Yuan

Systems Mapping of Yuan
Originally uploaded by thegreenguy.

Using Systems Thinking to understand the effect of the yuan peg to the dollar. The data for this diagram has been used from the article in The Economist "What do yuant from us?".

The mental model of "Systems Thinking" is more useful when it can be applied. Hence, this idea of using the mapping technique for the Yuan Peg.

This map is not entirely correct. I have not been able to map reinforcing loops and balancing loops. But I am sure if you read the economist article and look at the diagram it should make sense.

Click on this URL for a larger size, alternatively you can also click on the photo.

Update :(24th May) I have got some people asking for a simpler explanation of the mapping.

The map shows the following.

The American economy buys inexpensive goods from the Chinese which fuels the consumer and mortgage finance markets which in turn is responsible for the fiscal deficit in the US. This is supported by selling the US Treasury bills to other countries. China is the biggest buyer of all.

China maintains a Yuan Peg of 8.28 for the dollar. This is maintained by buying US treasuries. The US believes that the Yuan is artificially supported and it needs to be revalaued. The "shadow yuan" shows this to be true. Now, China needs this peg to support its exports and inflation. Exports will becomes less competitive and inflation will rise with the increase in the Yuan value which may bring about political instability.

The Shadow Yuan

The side-effect is that the Euro is appreciating because of this.

There are other reasons, but I guess you get the idea.

Now, there have been new developments with the US asking China to revalue or it will slap import taxes on its textile exporters. China has added new export taxes on its exporters before the US reacts.

I believe that this could be a short term development till China revalues its currencies. (BTW, there are many ways China can do this. The Economist has more info on this)

The side effect of this export tax is that Walmart is urging its suppliers to move to India where the Walmart supplier base is only $1 billion against a possible $100 billion for China.

I guess I need to change this map. This subject though randomly selected is becoming interesting by the moment.