The Yuan & Dollar Exchange

Mark — Sun, 21 Mar 2010 14:24:50 +0000

The exchange rate of the Chinese Renminbi or the Yuan has always been a point of contention between the United States and China and even between China and the European Union. Thus, within business schools and political science programs this exchange rate issue and trade deficit concern has now become a hot topic for research papers. The reason for this is manifold but in essence China keeps its Yuan or RMB undervalued in order to bolster its export market. By keeping the Yuan undervalued compared to foreign currencies a country’s export market benefits because its products that are manufactured in its borders and then sent overseas are cheaper than those of its trading partners. However, what makes this exchange rate issue even more contentious is the manner in which China keeps its Yuan undervalued and the outcome of this strategy. China keeps its Yuan undervalued by purchasing foreign debt or, with respect to the US, treasury bills which in turn has funded the US’ massive debt load and recent credit binge. Because China owns so much US currency it now has a great stake in how the US manages its economy but it also becomes dependent upon the US’ continued purchasing of its low-cost goods. Should the US government slap trade tariffs of any kind on Chinese goods this removes the benefit that China gains from undervaluing its currency. Presently China manages its exchange rate through a process called a managed float in which it keeps its Yuan pegged to a floating exchange rate that is pegged to a basket of currencies rather than pegged to a single currency. However, since China only publishes some of the specific currencies it includes in this basket of currencies it is difficult for outside markets to gauge currency movements. All of these factors ensure that the current Yuan exchange rate and trade deficit spat with the US will remain a complicated and complex foreign relations as well as economic issue. This is why the US-China exchange rate issue is such a popular topic not only in economics classes but also in foreign relations, international relations, as well as finance and business strategy courses. Presently many professors and instructors are assigning essays, term papers, and even theses and dissertations that discuss some aspect of the Yuan or RMB and US dollar exchange rate issues.

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The Yuan & Dollar Exchange