Chinese May Strengthen Yuan
February 27, 2010 - 2:51pm
For many years the United States has seen its trade imbalance with China balloon. According to the United States Census Bureau, the U.S. had a $6 billion annual trade deficit with China in 1985. During the course of the next 24 years that deficit has grown almost every single year. In 2009 the total stood at $226.8 billion, that figure is expected to decrease slightly in 2010 but it will still likely be in the range of $200 billion or more.
The explanation for our trade deficits with Mexico and Canada are relatively simple, we import costly oil from these countries and NAFTA allowed us to ramp up outsourcing of manufacturing to their markets. If you took oil out of the equation we would still carry deficits with them, but they would be much smaller.
However, our deficit with China involves zero oil effect, it is all related to our demand for Chinese exported consumer goods.
We don’t buy them because they are Chinese; in fact many assumed that “Made in China” means “low quality.” We buy Chinese goods because they are cheap. The only way for a nation like China, which is far behind the U.S. in terms of production efficiency and must ship its wares across the Pacific Ocean, to dominate the consumer market is through currency manipulation.
China, for years, has pegged its yuan to the U.S. dollar with the intent of always propping our currency up while holding the domestic currency down. This hurts Chinese citizens, who have to buy things with the undervalued yuan, but it also guarantees that they will be will be cheap workers. Cheap workers produce cheap goods, and when those goods are valued using a cheap currency the effect is doubled. According to the best estimates China’s manipulation of international currency markets may account for a 25-40 percent subsidy for its own companies.
Luckily for the United States, it seems as if 2010 may witness China allowing its highly manipulated currency to “float” slightly in international markets.
Instead of buying dollars with yuan and flooding the world with their bank notes, the government in Beijing may ease its purchase of dollars and allow the yuan to become stronger. Doing so would give more power to the growing consumer economy in the People’s Republic, but it will also ease a small amount of the subsidy burden that American companies must face in open competition with the Chinese.
According to Reuters, the international cacophony being leveled against China seems to have had an impact. The United States has complained, unofficially, for many years that Chinese policy intentionally undermines the American workforce. Nations in Europe have also joined the queue in voicing their complaints.
From July 2005 to July 2008 China allowed the yuan to strengthen by about 20 percent. This had a lot to do with China trying to prop up domestic consumption; an effort that somewhat consummated with the Beijing Olympics. Just in time for the Olympics, which showcased China’s ascent, Beijing put the brakes on the rise.
Now, China may be looking toward as much as a 5 percent annual normalization between the dollar and yuan in 2010. This will offer little solace to industrial employees who are already out of work, or whose jobs have already been moved to a brand new Chinese plant, but it could save a few American industries that are currently on the brink.
February 27, 2010 - 2:51pm
For many years the United States has seen its trade imbalance with China balloon. According to the United States Census Bureau, the U.S. had a $6 billion annual trade deficit with China in 1985. During the course of the next 24 years that deficit has grown almost every single year. In 2009 the total stood at $226.8 billion, that figure is expected to decrease slightly in 2010 but it will still likely be in the range of $200 billion or more.
The explanation for our trade deficits with Mexico and Canada are relatively simple, we import costly oil from these countries and NAFTA allowed us to ramp up outsourcing of manufacturing to their markets. If you took oil out of the equation we would still carry deficits with them, but they would be much smaller.
However, our deficit with China involves zero oil effect, it is all related to our demand for Chinese exported consumer goods.
We don’t buy them because they are Chinese; in fact many assumed that “Made in China” means “low quality.” We buy Chinese goods because they are cheap. The only way for a nation like China, which is far behind the U.S. in terms of production efficiency and must ship its wares across the Pacific Ocean, to dominate the consumer market is through currency manipulation.
China, for years, has pegged its yuan to the U.S. dollar with the intent of always propping our currency up while holding the domestic currency down. This hurts Chinese citizens, who have to buy things with the undervalued yuan, but it also guarantees that they will be will be cheap workers. Cheap workers produce cheap goods, and when those goods are valued using a cheap currency the effect is doubled. According to the best estimates China’s manipulation of international currency markets may account for a 25-40 percent subsidy for its own companies.
Luckily for the United States, it seems as if 2010 may witness China allowing its highly manipulated currency to “float” slightly in international markets.
Instead of buying dollars with yuan and flooding the world with their bank notes, the government in Beijing may ease its purchase of dollars and allow the yuan to become stronger. Doing so would give more power to the growing consumer economy in the People’s Republic, but it will also ease a small amount of the subsidy burden that American companies must face in open competition with the Chinese.
According to Reuters, the international cacophony being leveled against China seems to have had an impact. The United States has complained, unofficially, for many years that Chinese policy intentionally undermines the American workforce. Nations in Europe have also joined the queue in voicing their complaints.
From July 2005 to July 2008 China allowed the yuan to strengthen by about 20 percent. This had a lot to do with China trying to prop up domestic consumption; an effort that somewhat consummated with the Beijing Olympics. Just in time for the Olympics, which showcased China’s ascent, Beijing put the brakes on the rise.
Now, China may be looking toward as much as a 5 percent annual normalization between the dollar and yuan in 2010. This will offer little solace to industrial employees who are already out of work, or whose jobs have already been moved to a brand new Chinese plant, but it could save a few American industries that are currently on the brink.