China’s Exchange Rate Peg ConcerningEssay title: China’s Exchange Rate Peg ConcerningChina’s Exchange Rate Peg concerningTrade Policy with U.S.Overview of the ProblemThe U.S. and China trade imbalance continue to be on the rise. U.S. manufacturing firms and workers voiced complaints over the competitive challenges posed by cheap Chinese imports. China’s trade policy of pegging its currency, the yuan, to the U.S. dollar has enabled an unfair trade advantage according to the U.S. Some have gone as far as calling it “currency manipulation.” The outcome has been loss of U.S. manufacturing jobs and a U.S. trade deficit (Labonte & Morrison, 2005).
Political PressureAccording to the Bush Administration, China’s undervalued currency has contributed to America’s record $16 billion trade deficit with China last year and is responsible for the loss of 3 million U.S. manufacturing jobs since 2000. The G-7 discussions addressed the issue, but opinions differed. China felt that linkage to the U.S. dollar was a necessity. Expressing that currency volatility could disrupt the nation’s fragile banking system. The U.S. has placed political pressure on China by introducing bills to both the House and Senate to impose economic sanctions on China, if it does not move to a floating currency, such as 27.5 percent across-the-board tariffs on Chinese goods coming into the U.S. until the Chinese change it’s currency regime (Fiscal Study, 2005). China, a major rapidly growing economy, has a per capita income of only about $1,000 per year and with financial, legal and regulatory systems in desperate need of reform. For China to obtain a developed economy status they will have to address how they peg the yuan (Labonte & Morrison, 2005).
China’s Exchange Rate PegChinese for ten years now have maintained a fixed exchange rate for their currency, the yuan, relative to the dollar. The rate has been pegged at about 8.28 yuan/dollar for the entire period. What has resulted from this is that when the dollar has appreciated or depreciated in value relative to other currencies, such as the Euro, the yuan has appreciated or depreciated by the same amount. The central bank of China has maintained a fixed exchange rate by intervening in the foreign exchange market. This is done by selling yuan in exchange for dollar denominated assets. When the demand for the yuan increases the Chinese bank buys yuan with dollar denominated assets when the demand for the yuan decreases. The goal is to prevent the yuan from appreciating. This has resulted in foreign reserves held by the Chinese government to have risen by $153 billion to over $360 billion. The Chinese bank accomplishes this by either supplying or removing as much currency, as is needed to bring supply back in line with market demand, accomplished by increasing or decreasing foreign exchange reserves uses the following formula:
Net Current Account = Net Capital Account[(Exports-Imports) + Net Unilateral = [(Price Capital Outflow-Inflow) + Change in Foreign Exchange Reserves]Formula was taken from CRS Report for CongressCurrency Peg Impact on the U.S.Due to the China’s currency being significantly undervalued vis-а-vis the U.S. dollar by as much as 40%, resulting in cheaper exports from China and more expensive exports from the U.S., than if they were determined by market forces in which President Bush is a strong advocate for. The undervalued currency has contributed to the growing U.S. trade deficit with China. The U.S. trade deficit has risen from $30 billion in 1994 to $162 billion in 2004. The outcome has been a decrease in U.S. production and employment in manufacturing sector that can be especially observed in textiles, apparel and furniture due to low-cost goods from China. China also influences other East ern Asian countries to do the same to remain competitive (Labonte & Morrison, 2005).
P.S.: I am concerned by the level of concern of the U.S. in particular of the negative impact on its domestic competitiveness of the Chinese currency. Chinese companies generate a very large amount of money annually from the domestic economy. They generate U.S. goods and service exports, which are then exported by a variety of industries which are either U.S. consumers or foreign competitors. Such business competition contributes to rising domestic U.S. exports and a growing cost of living. The government is concerned about the “problems of the domestic business sector” (Nelson-Chafee, 2008). Such concerns are based on a lack of public investment in the domestic business sector for the past five years, which has caused a decrease in real wages and reduced employment in the sector. This has also resulted in a decrease in the value of real investment for workers, due to changes in how much workers are asked to contribute to their paychecks, or to their own personal accounts.The government has a long standing policy of allowing the domestic business sector to be competitive with the foreign one in order to maximize export-oriented production by investing in foreign manufacturing facilities or creating new U.S. industries. As the U.S. has increased exports and the foreign one has significantly undercut the U.S., China seems to be increasingly concerned about the growing problems of its domestic competitors. Therefore, the following is based on various government actions which should be taken at once.The Government will ensure that there are policies, instruments, and instruments to prevent potential economic mismanagement resulting from economic mismanagement (Piercer & Aplin, 2009). Such policies include, for example, the Export Protection Act, and the Anti-dumping Act.The most important action will be through the Export Policy Planning and Evaluation of China. The United States will undertake a range of policy actions which include, as a result of the Chinese Competition Review Commission, the U.S. Export-Import Bank, the Chinese Foreign Investment Bank, and the Export Control Act of 1940. While there is no reason why the Chinese Competition Review Commission should not seek to establish rules for the regulation of foreign exchange activities, there are several other policy steps which the United States should take. The U.S. Export-Import Bank must also be a key area where it should be actively coordinated and managed. In essence, in order to provide the United States more competitive results, the Chinese Competition Review Commission should make available its financial information to each State to help it monitor its compliance. It must also be included in the Commerce Promotion and Export Administration (CERA) and must be in the national defense industry. The U.S. government can also use the National Defense Export Control Board, which is a division of the Office of the President, as a tool which can enable states to better address market conditions and their own competitors. A central requirement for the CERA is the inclusion of an official Chinese website where all state officials will be able to promote China on a regular basis. For example, in January 2000, Congress approved the CERA in the event that China’s national security interests threatened the United States or were likely to adversely affect our financial, economic, trade and other external relations with China. With China being the largest importer of goods through Western Europe, North America and the Pacific, the U.S. could therefore continue to protect its commercial interests and trade with China. In addition, although the FSB has some influence at the state and sub-state levels, the FSB does not have the regulatory authority to issue any rules against foreign investment. It would be extremely difficult for the United States to simply shut down the CERA because it has nothing to offer to the other members of Congress or to state leaders of the party who should serve on the Foreign Affairs
The change in the value of the yuan relative to the dollar may cause an appreciation of U.S. exports to China by being less expensive, resulting in U.S. imports from China being more expensive. The price of Chinese goods in the United States would not change by as much as the change in the exchange rate, because only a portion of most exports from China are produced in China, and because the retail price in the U.S. includes marketing, transport, and other costs. One must recognize the following: True, China has a large trade surplus with the U.S. but one must also realize that China has a large deficit with the rest of the world, it does not have a large overall current account surplus.