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Whose Yuan is it Anyway?

Written by Johnny Rotten
Edited by Greg Bartolomei

Recently, Washington, D.C. has made a theme of accusing the Chinese government of currency manipulation. Washington’s charge is that Beijing has artificially undervalued the yuan through comprehensive intervention in domestic markets, stunting America’s economic recovery by giving Chinese corporations an unnatural competitive edge in Asian markets. In an American political beast ruled by a sluggish economy, this seems to be a safe stance to take for those seeking re-election. In the immortal words of famed political consultant James Carville, “It’s the economy, stupid.”

But is it true? Is this a process the Chinese government is genuinely undertaking? If so, are they breaking any international rules? Additionally, is it blocking America’s growth?

ChineseFlagCurrent estimates suggest that the yuan is undervalued somewhere between 25-40%, according to the Foreign Policy Association. Every day, Beijing buys an average of about $1 billion in the exchange markets . This keeps the value of Chinese currency from rising, so that the nation can continue to post other-worldly export statistics and can continue to record behemoth trade surpluses. This is a strategy uniquely available to China because of her centrally controlled economy. The government can use its public banks to keep domestic prices at manageable levels while artificially manipulating its currency.

China is a member state of the International Monetary Fund, an organization consisting of 187 nations that regulates global financial activity. While the IMF exercises no tangible control over any nation’s sovereignty in terms of their exchange rates, the group officially condemns currency manipulation . There is no binding legislation to force Beijing to revalue the yuan to appropriate levels. Still, the Chinese government is walking on a narrow ethical tight-rope. Despite association with the IMF, accusations that China has been taking advantage of the fund’s limited jurisdiction are warranted.

With all that in mind, it is important to take a critical look at the effect of this practice on the American economy. The Economic Policy Institute projects that an end to yuan manipulation would create approximately one million American jobs in the next few years . A rise in the price of Chinese products would theoretically make American products marginally cheaper. Ergo, American companies would enjoy greater success in foreign markets. However, it is difficult to overstate the importance of Chinese imports into American markets. In 2010, American imports from China totaled approximately $364.9 trillion . A reduction in that figure could spark domestic price increases in American markets. It is likely that the impact of Beijing’s actions is two-sided—with both benefits and drawbacks for the American economy.

2012 is scheduled to signal a shift of power in the Chinese government, and as a result, the issue is unlikely to be addressed internally until after the transition. In 2002, Hu Jintao was appointed General Secretary of the Central Committee, making him the most powerful man in China. Chinese tradition limits the person holding this position to two five-year terms, the second of Jintao’s set to expire next year. Additionally, much of the Central Committee has reached retirement age, so there is expected to be great turnover in the contents of the Chinese government . Until then, the lame duck Central Committee under Jintao probably will not alter this policy. Even after the power shift, it is unclear whether or not the new regime will bring revaluation of the yuan to the forefront. However, with the ever-increasing turbulence in global markets, this is sure to become a central issue in international affairs.

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 **Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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[1] Mihalakas, Nasos. “Chinese Currency Manipulation.” Foreign Policy Association. 11 Jan 2011. 28 Nov 2011. <http://foreignpolicyblogs.com/2011/01/11/chinese-currency-manipulation-%E2%80%93-explained-by-expert-bloggers-and-funny-bears/&gt;

[1] Sanford, Jonathan E. “Currency Manipulation: The IMF and WTO.” Congressional Research Service. 26 Jan 2010. 28 Nov 2011. <http://www.policyarchive.org/handle/10207/bitstreams/20107_Previous_Version_2010-01-26.pdf&gt;
[1] Scott, Robert E. “Currency Manipulation—History Shows that Sanctions are Needed.” Economic Policy Institute. 29 Apr 2010. 28 Nov 2011. <http://www.epi.org/publication/pm164/&gt;
[1] “Trade in Goods with China.” U.S. Census Bureau. 10 Nov 2011. 28 Nov 2011. <http://www.census.gov/foreign-trade/balance/c5700.html&gt;

[1] Chovanec, Patrick. “Primer on China’s Leadership Transition.” An American Perspective From China. 8 May 2011. 28 Nov 2011. <http://chovanec.wordpress.com/2011/05/08/primer-on-chinas-leadership-transition/&gt;

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