Yuan is now undervalued as Chinese government suppresses the currency's upward pressure to appreciate (i.e. not allowing market forces to dictate its movement and the supply-demand interaction)
China is therefore signalling to the world a Beggar-thy-neighbor agenda: "we want to export to you for our own recovery, not yours"
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Why China want to do this and what are the impacts on America?
- "to keep Yuan artificially cheap to give Chinese exports an unfair advantage in international markets, thus holding back America's economic recovery"
Why China should appreciate Yuan?
1. For its own sake
- It'll force its companies to become more efficient and high tech since they can no longer depend on a weaker currency (relatively cheaper when convert to local currency since it's weak) to compete with overseas firm.
- Materialize China's dream of the Yuan becoming a force in global trade and finance
- Transform China's investment-and-export growth engine to one based more on domestic consumption so as to reduce the economic's reliant on global demand, state spending and debt-driven investment (and since China's domestic market is large enough to exploit and support its economic growth)
- Sharp increase in Yuan's value would undercut the nation's export machine and cost valuable jobs (therefore gradual strengthening of the currency will be a better option)
- (no harm appreciating since previous episodes have shown that Chinese exporters can survive and even thrive - because imported components and raw materials costs less)
2. For the global economy
- External pressure cause tension to arise across the pacific
- Chain/Domino effect: BTN attitude encourages others to pursue similar policies (Japan for example intervene its currency in Sept first time after 6years to depress rising Yen to help its exporters compete with those from China and elsewhere) i.e. Competitive devaluation; raise nightmares that it might derail the already shaky recover from the Great Recession
- It is hurting poorer countries: cheap Yuan stunts their export sector by keeping Chinese products competitive with lower prices as compared t those from emerging markets
Why US wants Yuan to appreciate/strengthen against the Dollar?
- In hope of balancing trade between the two countries that China now has great surplus due to cheap Yuan and as a result cheap (comparatively) China product that spurred imports to US
- Cure its internal economic ills: unemployment and export deficient ((X-M)/net trade with China negative or low) via cheaper imports (US product) for Chinese consumer and companies, stimulating badly needed jobs.
Sub-conclusion
A stronger Yuan is good for just about everyone
US' retaliation
- recently passed a bill to slap punitive duties in goods from countries that keep their currencies undervalued
But a stronger Yuan may not necessarily help America, in fact, it can hurt US as well:
- Stronger Yuan will not automatically balance trade between the two countries; between 2005 to 2008 when Yuan appreciated about 21% against Dollar, America's trade deficit with China increased. China simply produces too many basic consumer goods.
America need to save more and spend less; Chinese need to spend more and save less.
- Expensive Yuan will also not encourage jobs and factories back to US from across Pacific, they will simply shift away from China (because strong currency make many export factories in China less competitive) to relocate at other developing nations (India, Indonesia etc) where costs are significantly lower than America's
Therefore it requires major structural reforms in both countries
