The Impact of the Chinese Currency

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China’s undervalued currency continues to be a popular topic of contention. When people talk about keeping the Chinese currency low, they mean that it is very cheap relative to something else, for example the US Dollar, the Euro or gold.  It expresses a ratio. The current exchange rate for RMB is $0.16. The theory is that by keeping the value of its currency relatively low, China encourages other countries, such as the United States, to import more goods from China. It is no wonder China would want to keep the value of its currency low because it encourages an increase in imports and trade, which acts as a catalyst for job growth in China. As the demand for cheap Chinese goods increases, the production of these goods must increase as well, thus encouraging an increase in jobs.

The Chinese government sets a trading range for the value of its currency relative to the American dollar. A trading range is the “range” of prices traded during a period of time.  The People’s Bank of China determines the trading range. The range has a direct impact on the prices paid for Chinese imports. When the trading range is strong, Americans are less likely to want to import goods because more dollars are needed to buy the same amount of Chinese goods. Thus, the goods are now more expensive in the United States. When the trading range is weak, American dollars are able to buy more Chinese goods and the demand for imports increase.

The debate over the Chinese currency impacts not only China’s economy but the US economy as well, which is why it has become a major issue of concern in American politics. US politicians are cracking down on China due to the polls that show that most Americans are blaming China to some extent for America’s current economy.  The Pew Charitable Trust conducted a poll examining American’s views on China. For example, during the early stages of President Obama’s presidency, the president was urged to do something about the frail Chinese currency. In the most recent presidential election, Mitt Romney nicknamed China the “currency manipulator” and would work to raise the tax on imports of Chinese products into this country. Romney has argued for taking stronger measures against China than Obama. However, beginning a currency war with China, or implementing trade tariffs, can hurt the United States as much as it would hurt China. U.S pressures on China can be effective; the renminbi rose substantially under pressure from President George W. Bush’s administration, before becoming much more consistent from 2008 until 2010.

Despite the controversy over raising the value of China’s currency, the renminbi remains undervalued, relative to all other currencies, by 5 to 20 percent, according to various estimates.

Obama met with China’s vice president to discuss currency undervaluation as a trade practice that concerns the United States. The meeting was part of the US objective to persuade Chinese leaders that it is in their interest to create a stronger currency. Although cheap Chinese currency encourages the United States to buy more Chinese products and therefore improves employment, Chinese workers can’t buy as many goods from other countries because their currency is so cheap. This begs the question of whether currency undervaluation in fact hurts Chinese workers.

China’s economic rise has resulted from a growing industrial sector that benefits from a cheap renminbi. However, this current currency value has both benefits and drawbacks for China and other countries.

Increasing the value of the renminbi increases Chinese households’ buying power by reducing the cost of the imports to China. Furthermore, increasing the currency’s value encourages companies in China to manufacture higher quality products that bring higher-paying jobs, rather than competing mostly on price.

Since China is the biggest purchaser of US Treasury Bills, it would benefit them if their currency were higher because it would cost them less to buy these Treasury Bills.  However, this has to be valued against the benefits of cheap currency in terms of its international trade relations. This contrary impulse has to be valued against the benefits of cheap currency in terms of its international trade relations.  This is a good illustration of the difference between a manufacturing-oriented economy, which wants cheap currency so it can sell more products, and a consumer-oriented economy that imports many products and benefits from an expensive currency. Officials from the United States, Brazil, Europe and elsewhere are seeking a stronger renminbi, explaining how it will lead to more balanced, sustainable growth for the whole world.

In 2010, when the global recession was slowing, yet political frustration with China was rising, American officials and others began to have more success influencing Chinese currency rates. According to David Leonardt of the New York Times, “The renminbi has risen 8.5 percent against the dollar. Since June 2010, with the pace having slowed in the last six months. Taking into account the different inflation rates in the two counties, the effective increase is closer to 12 percent.” The rising value of the renminbi has decreased China’s account surplus, which is a measure of the difference between a country’s exports and imports. However, it seems that with more pressure from America, the value of the renminbi will continue to rise, which will positively impact the country.

While cheap Chinese currency encourages the United States to buy more Chinese products and therefore improves employment, the low renminbi value negatively affects Chinese workers who are unable to buy many goods from other countries because their currency is so cheap. Furthermore, the low value of the currency hurts America’s economy. Only time will tell whether China decides to adhere to America’s pressures or maintain its reputation as a “currency manipulator.”

 

Sara Weber

Brandeis University

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