How Chinese Currency Manipulation Affects You
There is no debate about the fact that the Chinese government regularly intervenes in world currency markets to keep the Chinese currency, the yuan, deliberately weak against the U.S. dollar. The United States has been complaining about this fact for years, and the Chinese government has agreed, stating that they intend to slowly and steadily strengthen the yuan against the United States dollar, in measured increments.
This strengthening has occurred over the past few years, and the Chinese central bank has increased the yuan approximately 7 percent during that time. However, this past spring, the Chinese have again begun to depreciate their currency. Although the Americans may protest that this is deceitful and unfair, the reasons for this are simple: The Chinese economy has slowed significantly from its previous pace, due to a rapidly deflating real estate bubble, declining foreign investment - due to concerns of a weaker economy, a vicious cycle - and weak retail sales.
With the Chinese central bank targeting a lower exchange rate, they can prop up their own flagging economy and stimulate domestic sales, albeit at the expense of other nations.
What does this mean to you, the average American consumer, in terms of your pocketbook and your life?
1. The weak yuan/strong US dollar combination makes “Made in China” products on American shelves less expensive. If the Chinese government allows the yuan to increase by 10%, that will mean a direct increase in the costs of everyday products. This is a good thing for millions of low and middle-class Americans, as well as millions of American companies who buy cheap Chinese imports.
2. The weak yuan/strong dollar makes “Made in America” products on Chinese shelves more expensive. This weakens demand in China for American products, by encouraging the Chinese to purchase their own products, and stunts the growth of U.S. exports to China. This can have negative effects on employment in industries that export products to China.
3. A weak yuan followed by a surge in Chinese exports, while good for the Chinese economy in the short run, may act as a long-term catastrophe for other developing nations during this period of global weakening, by driving demand to China. At the extreme, this could result in many developing countries exiting certain businesses, leaving China as the major or sole exporter.
4. China has also been recently shifting to higher-technology exports, which could begin to displace workers from the U.S., Europe and Japan. Such a fear is clearly not unfounded, as this is exactly what happened with industrial production.
The issues involved with currency markets are many and complicated. The obvious solution from an American point-of-view – just “make” the Chinese increase their currency and play fair – is not as simple as it seems.
Such tough negotiation could touch off a new trade war, in which both countries would likely lose. An increase in protectionist policies tends to reduce costs for domestic manufacturers at the expense of domestic consumers. In other words, U.S. companies would likely benefit, but U.S. consumers would probably lose.
So the next time you hear someone discussing the unfairness of the Chinese currency exchange rate, be sure to take all sides of the debate into consideration before you draw your own conclusions about what you think might be best for America.