Posts Tagged ‘US-China Trade Imbalance’

Currency Manipulation in China

February 4, 2010

China has rebuffed American calls for the government to revaluate its currency, known as the renminbi or the yuan.  The Chinese manipulate their currency by keeping it artificially low vis-a-vis the dollar.  The consequence of this policy is that Chinese exports remain relatively cheap and American goods coming into China are more expensive than they would otherwise be.  Asia’s rising economic power is pursuing an export-led growth model to fuel its booming economy, which grew by more than 8 percent last year despite the global recession.  Leaders in Beijing know that if they let the renminbi appreciate it would almost certainly have adverse consequences in terms of the country’s trade balance; however, there are rumors that later this year China will let the yuan appreciate slightly in order to control inflation, which has been on the rise since a $585 billion stimulus package was introduced to mitigate the effects of the worldwide economic downturn that has plagued other countries.

There is little the US or other nations can do to compel the Chinese to let their currency float more.  China has helped stabilize the global economy through its continued economic expansion and facilitation of other nations’ stimulus programs, and America is dependent on its Asian partner to bankroll fiscal deficits by buying US treasurey bonds and maintaining large foreign currency reserves.  The only moves that Congress or the administration could make to punish China would be to embrace protectionism or weaken the dollar through inflationary measures such as printing more money or issuing more bonds, all of which would ultimately be counterproductive.