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Government & Business

By: Phillip Yang

China’s Cheap Currency

United States should stop worrying about the growing trade deficit and low valuation of China’s currency.

History might have repeated itself again as the US Congress restarts its protectionism by introducing new legislation aiming to our number one trading partner, China. With our annual trade to China reaching well over $200 billion dollars annually, no wonder Americans are getting worried about the growing trade deficit.

Don’t use China as a scapegoat for domestic economic problems. Think of China as an ally and a huge contributor to lowering the cost of goods for the average consumer. Think of this as a way of subsidizing American consumerism and bringing cheap imports for our consumption. Like what a Chinese proverb might say, be careful what you wish for.

The solution called on by legislatures in the house and senate to raise the valuation of China’s currency by 30 percent is probably an issue the US can’t forcibly enforce. Even through the World Trade Organization or other indirect channels, this method of raising the Yuan won’t curb the level of imports coming into our country.

Simply raising currency rates and making Chinese exports more expensive will simply force manufacturing into other Asian centers such as Vietnam and Thailand.

Positives to China’s growing exporting activities add to the overall US economy by reinvesting each dollar earned by exports back into the banking scene by investing in US Treasury bonds. There is so much to lose in this proposal to curb imports and force other countries to raise their own currency for the purpose of lowering the impact of the ever expanding trade deficit

Unintended consequences are virtually unlimited. As China currency rises, its ability to have a comparative advantage in production diminishes thus impacting China’s overall export orders and the amount it receives as US dollars. As the dollar becomes increasingly difficult to obtain and less abundant, China will buy fewer Treasury bonds in the future raising interest rates thus forcing the US government to work harder to attract more investors to finance its obligations. Bad news for anyone looking to obtain loans in the future since interest rates will be even more expensive as it is today.

Second from the list of consequences would be the larger purchasing power of the Yuan. Since the US is proposing to raise its currency by 30%, everything China buys will have a greater impact since its valued higher thus making goods cheaper for Chinese citizens. Recently, China has been experiencing a phenomenon within their own population with citizens purchasing more goods and services than they did decades ago. Vehicle sales are increasing 25% annually and gasoline consumption is on the rise. As their currency is valued higher, everything is automatically cheaper on the outside. Oil immediately became 30% cheaper; roads, equipment, real estate, investment firms, and anything tangible have become 30% cheaper, this sort of revaluation might not be so bad for the Chinese after all.

But we can’t all be doom and gloom about this. There are certain benefits of this revaluation in terms of the US. On paper, imports will look increasingly cheaper for the United States but the impact of this is still unclear. Chinese buyers with a lot of cash because of the revaluation might look into the US market and view it as relatively inexpensive and give new cash to sellers of mature and declining industries to reinvest into new areas of the economy.

This type of legislation is clearly one of those proposals where the benefit is too small and the expected consequences are too big to fully understand in today’s marketplace.

Forcing China to raise the Yuan or even blocking exports from their country will only damage relations and cause more catastrophic damage to everyone involved. It won’t do anything to improve the competitiveness of US firms or raise our living standards domestically. We can’t be using legislation like this to distract us from what’s really important and use it as cover for our own inefficiencies. We must focus on creating open markets and encourage US companies to continuously innovate and keep their edge so that economic prosperity is shared.