There is a growing problem regarding currency between China and the U.S since the current account surplus of China to the U.S. is becoming larger, as China’s currency supposedly remains “undervalued”. The current account surplus of China to the U.S. is about to hit $250 billion, which translates to a current account deficit of the U.S. to China of around $250 billion. The current account deficit that the U.S. holds in comparison to China is its largest with any country.
China’s current account surplus can be a result of its investment in the U.S., as investment is an export. In that case, the trade surplus that China hold is not that bad, as U.S. businesses can use that money, become more productive, and distribute higher wages to their workers. U.S. investors have not really had the chance to invest in other nations, or in other words, export to other nations, due to the policy that has existed for decades. Policies have forced the younger generations to give up their savings to help the older generations. This meant that young people were unable to invest as much in other countries.
The U.S. has been hesitant in accusing China of currency manipulation, as there could be serious political and economical consequences. In fact, the U.S. has fixed its own currency to other nations in order to gain trade advantages in the past as well. China’s currency, the yuan, has in fact depreciated 6.9% to the U.S. dollar between February and October of 2009. American manufacturers argue that the yuan is undervalued by 20 to 40% against the dollar, which allows China to have huge advantage in trade. If the yuan were cheap, Chinese exports would be cheap as well, and so American consumers would be more willing to buy imports. This hurts the domestic producers of the U.S. since consumers would not buy as much of their product. Chinese consumers would not buy American products since the dollar would be stronger relative to their currency, and so the American exports would be expensive. This would explain why American producers would be unhappy about China keeping its yuan purposefully low.
However, forcing the yuan to become more expensive would not help the problem that exists in the U.S. A way to fix the problem would be to reduce Chinese imports and increase exports to China. Making the yuan stronger would have no effect since the Chinese could just reduce the supply of their currency on their market. Reducing their currency supply would cause the yuan to appreciate against the dollar. Prices within China woud fall, and Chinese producers would then be able to produce their products at a lower cost. Once again, Chinese exports would be cheaper, so American consumers would continue to purchase Chinese products.
Due to the weakness of the yuan, the exports in China have been high. As a result, China’s foreign exchange reserves contains $2.27 trillion as of September 2009, which is 20% more than the year before. China’s foreign exchange is the world’s largest, and this is all because it has continually had a current account surplus. The U.S. is especially upset about this, since China’s surplus is U.S.’s deficit.
China states that it wants its currency to be internationally convertible, but it maintains control over their currency and economic policy. Basically, China’s currency is not determined by supply and demand. Therefore, it is incredibly difficult for the U.S., or any other nation, to appreciate or depreciate China’s currency.
There are other nations that also have an appreciating currency, which they are desperately trying to depreciate. The Japanese currency, the yen, is a fine example of this. The yen has rose 14% in value between May and September of 2010. In an attempt to devalue their currency, the Japanese government sold around $20 billion worth of yen onto the market. Another problem in Asia is that there is inflation building up, leading to interest rates rising as well. Investors view this as a great opportunity to invest, and many Western investors have sent money over to Asia. Brazil is another nation that has a strong currency. Their currency has grown 30% stronger relative to the US dollar as of 2010 when compared to 2009. The authority has mentioned that it might impose taxes on short-term fixed income investments, which would reduce the number of foreign investments, or exports. Their current account deficit would therefore, shrink.
All in all, every nation secretly wishes to have a weak currency so that they can export more and import less, and therefore, build up their current account surplus, or foreign exchange reserves.
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