China’s Artificially Low Currency
From a fixed currency exchange rate, China has moved on to be a managed currency exchange rate. The fixed currency exchange rate is when the value of a currency is fixed to the value of another currency or to the value of other commodities. On the other hand, a managed exchange rate is when the exchange rate is floating between a floor and a ceiling limit that the government assigns. With this being said, China deeply relies on the supply and demand in the market to set their exchange rate. In the end, China’s economic state regarding currency and exchange rate relies greatly on the demand from other countries, namely the United States. With China maintaining a high currency account surplus, they are having a hard time maintaining a good relationship with others countries. Other countries think that they are being taken advantage of and that China is “cheating”.
“Some US lawmakers and industry groups allege that China keeps its currency at artificially low levels against the dollar to gain advantages in trade.”
The Sino-US trade is an important relationship in the trading industry, and any controversy stirred up with these countries is a big deal. The US claims that China’s currency (RNB) is kept artificially low against the U.S. currency (USD), to gain advantages in trade. These unfair advantages which are gained by the Chinese is a result of dumping. Dumping is when an economy sells its products and services at a price lower than its unit cost of production. By keeping their currency low, and lowering it even more, they are devaluating their currency which is called depreciation. With a depreciated currency, exports are cheaper and imports are more expensive.
China is in a surplus right now, and they are manipulating their currency to stay in a surplus. By having a depreciated currency, countries demand more of China’s goods, and the inflow of currency into China stays large. In simple terms, when a country has a current account surplus, they have a high number of exports and a low number of imports. Because they have a surplus, this should cause the currency to appreciate, so they start to import more, and thus they self correct their currency to have a more balanced one.
When we think of and look at countries in terms or deficit and surplus, when one country is in surplus another was is in deficit. Due to this, specifically in the US, the manipulation of the currency is “destroying jobs and limiting growth in the U.S.”. One way that China is manipulating its currency is through putting their money on the market. By having an excess amount of exports on the market, it will depreciate its currency and thus keep the exports high and its imports low. A depreciating currency is when there is a “fall in the value of one currency in terms of another currency in a floating exchange rate system”.
If the yuan is weak, theie exports will increase and the imports will decrease because the yuan is cheap from the perspective of other currencies. With the yuan decreasing, other countries, such as the US will experience an appreciating currency in relation to China. However, if the yuan were to get stronger and China was in surplus when this happens, then the exports would decrease and the imports would increase. Since China’s currency would appreciate in this case, other currencies such as the US will experience a depreciating currency and thus exports will decrease because Americans have less purchasing power. This would thus decrease the surplus and shift the current account balance closer.
Over all, China’s currency is artificially in a surplus right now and has been for a while. If China were to stop keeping their currency artificial, their exports would decrease and imports would increase which would lead to an increase in unemployment.
