Why Is China Trying to Hold Down the Value of the Yuan? What Evidence Suggests That China Is Indeed Pursing a Weak Currently Policy?

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Relaxing currency controls and restraints on capital outflows would result in increased capital outflows and also an increase in the demand for foreign currency. These factors and the increased demand for foreign exchange would reduce the pressure on the yuan to revalue. Also, it could even result in a depreciation of the yuan if the demand for foreign assets (for diversification and investment purpose) were great enough as there are already signs of asset bubbles in China, which is actually a possibility as investors scout greater opportunities.

9. In 2011, six years later, the U.S. Senate was again considering a bill that would punish China for suppressing the value of its currency to give its exports a competitive advantage. Why have both the Bush and Obama administrations, one Republican and the other Democratic, resisted such legislation?

There was a concern among both Presidents Bush and Obama that such an action could results in a trading war. There was probably awareness that the United States trade deficits was not caused by an artificially depressed exchange rate but instead, caused by the saving imbalances between the United States and China. In the time of record budget deficits, they were probably concerned of being too dependent on China handling its currency and it would create a risk with America’s biggest creditor at a time of record budget deficits. Because the crawling peg was adopted on the 21st of July, 2005, shortly after the legislation was introduced, we could assume that this proposed legislation had some effect as it affected China’s exchange rate policy. In addition, when the float was adopted in 2010, there were some noises that the legislation was reintroduced in Congress.

1. China is trying to hold down the value of the yuan because the Chinese government

believes that the appreciation of their currency can cause serious challenges to its export

industry, as the price of the exported goods will increase causing the demand for Chinese

goods worldwide to weaken and eventually causing serious unemployment in the country.

The most obvious sign that China is pursuing a weak currency policy is shown by the

Chinese Central Bank had been maintaining a ±xed exchange rate for years. Now China’s

Central Bank adopted a managed ²oat where it simply sells the yuan and buys vast amounts

of dollar reserves.

2. China expects to bene±t a weak currency policy. China can boost economic growth, which

keeps unemployment down, drives business and knowledge through China and encourages

Chinese trading partners to further grow. In other words, by simply keeping the country’s

main driver of growth, exports going strong. China needs a weak yuan to continue achieving

3. American consumers would be paying $55 billion more annually for the $200 billion of

Chinese products it imports if a tari³ of 27.5% would be imposed. This of course would allow

domestic products to compete with its Chinese counterparts but could spark a huge trading

war.

4. The yuan appreciating 25% would lead to a 25% depreciation of the dollar. Chinese

products being more expensive leading to the domestic products being more competitive

and the appetite for the Chinese goods dropping in favor of domestic products due to the

currency exchange.

5. The Central Bank of China tries to maintain the yuan arti±cially lower by selling yuan and

buying up all the foreign currency in²ows. The main problem with this monetary policy is

that the money supply for the yuan is rising fast and this could cause massive in²ation in

the long term. The Chinese government will have to raise interest rates in order to keep

in²ation from going through the roof.

6. Yes, undervalued currency does come at a cost. Chinese consumers must pay higher

prices for foreign goods and consumers. It is more di´cult for Chinese businesses and

investors to expand into foreign markets. And, Chinese tourists have to pay more when they

are abroad.

8 Relaxing currency controls and restraints on capital out²ows would increase capital

out²ows and increase the demand for foregin currency. These factors should thereby

decrease pressure on yuan to revalue. The yuan may depreciate if there is enough demand

for foreign assets as there are already signs of asset bubbles in China, this is actually a

possibility