Yuan Politics: Understanding China’s Undervalued Currency

A picture of the Chinese 5, 10 and 50 yuan bills. On average (over the past 5 years), 1 US dollar has equaled between 6 and 7 Chinese yuan. (Christina B. Castro/ Flickr Creative Commons).

A picture of the Chinese 5, 10 and 50 yuan bills. On average (over the past 5 years), 1 US dollar has equaled between 6 and 7 Chinese yuan. (Christina B. Castro/ Flickr Creative Commons).

Recently, the Huffington Post released a widely popular three minute compilation video of Donald Trump repeating the word China with varying degrees of contempt. As apparent in the video, candidate Trump has made attacking China a major plank in his platform, blaming them for America’s economic woes. Pointing fingers at China is not new; the American political right and left have strongly criticized China’s trade policy for many years. Constant bashing of China, especially by influential media figures, has created a dominant discourse that portrays the issue in black and white: Beijing is deliberately using policies like currency manipulation to grow their economy at the expense of other countries. This view is difficult to argue with in light of recent evidence after China, on August 13-15, devalued their currency by 3% against the dollar—the biggest change in value since 1994.  

Intuitively it might seem that the devaluation of the yuan is negative for the United States. In principle, a weaker currency makes exports cheaper and more competitive, attracting export businesses to China. This economic principle is used to explain why the US lost 3.2 million jobs to China between 2001 and 2013, 2.4 million of which were manufacturing jobs. This job loss has led to a strong negative perception in the US regarding China’s economic growth. In a Gallup poll, 40% of respondents thought that China’s rising economic power was a critical threat to the vital interests of the US, and 44% of them indicated it was an important one. However this time, Beijing’s move to depreciate its currency may actually be positive for both countries.

Firstly, it is important to understand that the weak yuan (with respect to the dollar) has hardly been a determining factor when it comes to the US’s trade deficit and job loss. While America has certainly lost several million jobs to China in the past 10 years, the vast majority has been a result of high wages and the high cost of manufacturing in the US. In fact, many jobs have gone to other developing countries such as Mexico, South Korea (800,000 and 70,000 jobs respectively) and India (65% of all offshored IT work). Additionally, the term “losing jobs” is a misnomer, as China’s rapid economic growth has dramatically increased the job market all across the globe, especially in the resource extraction industry and manufacturing of parts that have final assembly in China: a positive-sum game. The United States’ consumer culture, high budget deficit (which, according to the twin deficits hypothesis, can cause a trade deficit) and movement away from relatively low-paying blue-collar jobs have also played a major role in this labor market transformation.

Statistically speaking, the only time Beijing’s currency manipulation was so severe that it significantly reduced the competitiveness of American exports (by making Chinese products much cheaper) was between the years of 2007 and 2009, when the currency was 20-40% undervalued against the dollar. China had good reason to keep their currency artificially low because of the global financial crisis and its negative effects on their export industries. Because of the currency devaluation, their economy stabilized, helping the global economic recovery. However, outside of the economic crisis, Beijing has been careful not to be too anti-competitive, and has allowed the yuan to slowly appreciate against the dollar. Moreover, a high rate of inflation (especially wage inflation) associated with China’s fast economic growth boosts prices and diminishes their currency advantage.

Secondly, the rapid deceleration of the Chinese economy poses a serious threat to both the global and US one—the devaluation of the yuan can help temper this deceleration. China has been growing comfortably at an unbelievably consistent annual growth rate of 10% of GDP for more than a decade, but now is growing at less than 7% with projections for 6% next year. While 7% and 6% economic growth is a desired figure for most economies, China has been growing at much higher levels for a quarter century, and 7% has long been seen as the minimum growth rate needed for social, economic and political stability in a country that still has tens of millions of poor peasants.

Though generally a fast growth rate must reach more sustainable levels in the long-term to prevent a bubble from developing, the current rate of deceleration is too rapid for the world to properly adjust without harm. China has the second largest economy in the world ($10.36 trillion) and is a reliable driver of the global economy; their sudden decrease from a previously consistent 10%-plus economic growth has lowered commodity prices, decreased demand for American and European exports (total imports decreased by 17% in May), and could drag the already relatively anemic world economy into further economic doldrums. The recent currency devaluation serves as a stimulus to their sagging export sector, which faced a whopping 8% decline in July. The devaluation helps reverse their slowdown, or at least tempers the deceleration to the benefit of US exporters and global economic stability: both major US economic priorities.

Finally, the yuan devaluation generally marks a major positive change in Chinese policy. America’s biggest criticism of the Chinese government is its strong hand in the value of the currency and stifling of market forces. However, China’s economy has matured to a certain extent and accordingly, the Chinese Central Bank (CCB) is moving to let the yuan be more receptive to the international market. Due to their slowdown, there has been some capital flight, meaning that money and investment is leaving the country. The immensely volatile stock market signals this. With the downward pressure depreciating the yuan, the CCB satisfied market pressure through devaluation and have promised to let market forces have more power. With that said, the yuan is not completely free floating—the CCB has stated that they still reserve the right to intervene to stabilize the currency. This is an important assurance in order to prevent a massive free fall in the yuan’s value due to the current market volatility. Given their need for stability, they will likely stick to their promise for slow and steady liberalization of their currency market rather than breaking the promise recklessly, which would only create more confusion and distrust.

China’s currency manipulation is a convenient scapegoat for America’s shrinking manufacturing sector and large trade deficit. But even if China had a completely floating currency, jobs would still have left, and China would still have a skyrocketing economy (albeit with more unstable growth). While their recent devaluation may draw ire from Donald Trump and others, it may actually be a gift in disguise, by bringing stability to the weakening Chinese economy in the short-term and bringing the currency closer to the market value in the long-term.

The views expressed by the author do not necessarily reflect those of the Glimpse from the Globe staff, editors, or governors.


About Author

Kenneth Lee is a Senior double majoring in International Relations/Global Economy and East Asian Area Studies at the University of Southern California. On campus, he is a fellow at the USC Korean Studies Institute where he has written and presented on the research papers regarding South Korea’s nuclear weapons program and its economic history. He was the Vice-President of Competition for MUNSC, USC’s Model UN team, attending conferences around the country. He also participates in the USC Teaching International Relations Program, teaching students international relations at local high schools. Kenneth was also chosen to participate in the Fulbright US-UK Summer Institute and studied at SOAS in London in 2016.

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