Resumo de China And The Dollar

China and the Dollar

Since 1994, China?s currency, the Yuan has been pegged to the dollar at a fixed exchange rate ? 8.28 Yuan per U.S. Dollar. However, the declining value of the U.S. Dollar to most world currencies has the Chinese worried. This, along with international trade pressure and other factors has Beijing ready and committed to put the Yuan on a floating exchange rate.

Being on a fixed exchange rate has been very favorable to the Chinese trade balance. With a the Yuan being largely undervalued (15-25% by most estimates) it is a good situation for Chinese exporters because Chinese goods become very cheap in foreign markets while foreign goods become expensive in the domestic market so exporters have more business with less competition. Of course with China modernizing quickly, many countries are complaining that China no longer needs a fixed exchange rate and that massive amounts of ultra-cheap Chinese imports are flooding their domestic markets and putting natives out of business.

Changing over to a floating rate, however, may not be as smooth as many anticipate. For if a floating rate is instituted right away there will most likely be rapid deflation. This is because the currency is undervalued and once it?s revalued the price of things will drop as the currency increases in value. While this may hurt big business in China, it will most likely help the Chinese consumer by giving them increased purchasing power which many, like China?s rural residents, desperately need.

Deflation, however, is not the only possible consequence of the floating rate. It is also possible that there will be massive inflation due to the way the Yuan has traditionally been pegged to the dollar. Every time the Yuan rises to the dollar, the Chinese monetary authorities have flooded the market with Yuan by printing more and holding domestic debt in Yuan. While the debt should actually be priced upwards, the government does not allow it to be. Thus, if a floating rate is taken up there may be a flood of Yuan from this domestic debt that will cause inflation. Inflation is the Communist party?s worst enemy- it caused many of China?s uprisings in the past including the Tiananmen Square massacre and arguably the Taiping revolution.

In the end, U.S. Lawmakers and the international community alike are looking for ways to even out the playing field for the Chinese. Holding such a competitive advantage of a huge, hardworking populace with government controls on trade barriers makes it very difficult for other countries to compete with China both macroeconomically and even microecnomically. Perhaps de-pegging the Yuan will be an excellent solution to the problem, but no one can really say for sure.

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