RSS FeedSince 1994, the Chinese government has maintained a policy of intervening in currency markets to limit or halt the appreciation of its currency, the Renminbi or Yuan, against the U.S. dollar and other global currencies. Some financial analysts charge that this policy has made Chinese exports to the United States significantly cheaper, and U.S. exports to China much more expensive than would occur under free market conditions.
Some policymakers argue that China’s currency policy is a major factor behind the large annual U.S. trade deficits with China and has lead to the widespread loss of U.S. manufacturing jobs.
Some economists contend that China’s currency policy has been disruptive to global economic recovery because it induces many countries to intervene in currency markets in an effort to hold down the value of their currencies against the Dollar in order to enable their firms to remain competitive with Chinese firms. Other economists have expressed concern that these actions may worsen economic imbalances and could undermine the world trading system.
China’s policy of intervention to limit the appreciation of its currency, the Renminbi or Yuan, against the dollar and other currencies has become a major source of tension with many of its trading partners, especially the United States.
Some global analysts contend that China deliberately manipulates its currency in order to gain unfair trade advantages over its trading partners. They make a case that China’s undervalued currency has been a major factor in the large annual U.S. trade deficits with China and the loss of millions of U.S. manufacturing jobs, stressing that because of the current high rate of U.S. unemployment, this can no longer be tolerated.
Chinese officials have consistently insisted that China’s currency policies are intended to promote economic stability and do not impact other countries negatively. From July of 2005 to July of 2008, China let the Yuan to gradually appreciate against the Dollar. However, once the effects of the global economic crisis became apparent, the appreciation of the RMB was halted and the exchange rate with the dollar was held constant at 6.83 Yuan. This move was criticized by many of China’s major trading partners, including the United States and the European Union. China responded by calling the growing international pressure on China to appreciate its currency “protectionism.”
Although economists differ as to the extent of the Yuan’s undervaluation against the Dollar and the economic effects that undervaluation has on China’s major trading partners, including the United States (many cite both positive and negative effects), most agree that currency flexibility would be an important factor in helping to reduce global imbalances, which are believed to have been a major factor that sparked the global financial crisis and economic slowdown. They further contend that currency reform is in China’s own long-term economic interest.
However, many economists argue that a Chinese currency appreciation will do little to reduce trade imbalances in the United States and China unless such action is accompanied by changes to U.S. and Chinese macroeconomic practices (i.e., the United States would need to save more and consume less and China would need to save less and consume more), which could lower overall U.S. imports (including from China) and boost China’s overall imports (including from the United States).
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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