Is China manipulating its Yuan? US v.s. China

The inflexibility of the Chinese Yuan has been a problem for the world, especially the United States. The United States claim that China is manipulating their currency through exchange rates to gain the advantages of low costs in exports, causing the suffering of suppliers in the United States that cannot compete with such low prices. Several articles relating to this topic show concern to the current account surplus China is gaining, undervalued Yuan, and the weak attitude of the U.S. towards China.

An exchange rate is the price of one currency in terms of another currency. China originally had a fixed exchange rate that does not fluctuate from the demand and supply of the currency, but in 2005 they discontinued this system and changed to a managed exchange rate. A managed exchange rate fluctuates from the demand and supply of the currency but can be manipulated by the government to stay at an accepted range of value. From this system, China is able to manipulate its currency to gain the advantages of a devalued currency.

The United States is currently accusing China for keeping its Yuan value extremely low compared to what expectations say from China’s extreme number of exports into the U.S. From an economics point of view, the high number of exports by China should cause an appreciation in the value of the Yuan.

The depreciated Yuan will cause a surge in the exports from China due to the cheap prices of the products. Thus the quantity of yuan demanded by American importers will increase, causing a shift in the demand  from D to D2. This should cause the value of Yuan to appreciate from P1 to P2, which in the long term will decrease the exports and increase imports to balance out.

Despite these predictions, the Chinese Yuan has not appreciated and has stayed at its initial value. A current account surplus is when the revenue gained from exports is greater than the expenditure from imports. China, because of its cheap Yuan, continues to gain the advantage in international trading with a great number of exports into nations such as the United States. While China gains from their trading relationship with the US, the United States have fallen into a pit of current account deficit where it imports a great amount of goods from China while not exporting much to the world. We can say that China has kept its yuan low by keeping a great supply of Yuan on the market and buying US debts. From circulating the Yuan in the market, China is able to manipulate the value of its currency and keep its advantages as shown in the graph below.

There are various consequences of a weak, strong yuan and dollar. The weak yuan has given advantages to the exports of China with low prices outdoing the producers in the United States,  increasing its current account surplus. The high current account surplus indicates a high amount of exports but also indicates the low standards of living due to the small amount of imports into the nation. The United States are unable to export goods as much as China because of the manipulated Yuan that does not balance out and keeps at a low value, thus is increasing its current account deficit by importing vast amounts from China. If China is prevented from this manipulation the Chinese Yuan will appreciate due to the increase in demand of Yuan, which will decrease the exports in the long run and balance the amount of export done by China and by the United States.

BBC states, “if China had been designated as a currency manipulator, it would trigger negotiations between the two countries and could lead to economic sanctions if the US took a case before the World Trade Organisation.” The manipulation of the yuan causing an inability for the United States to improve their current account deficit is an issue to the WTO as well as the world, and may affect the international accessibility of Yuan which China wishes to achieve.

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