The Chinese Yuan finally seems to be showing signs of rising. Actually, left to free market forces, the Yuan would have appreciated much earlier and by a greater amount. However, the Chinese government has traditionally kept the Yuan undervalued in order to keep Chinese goods cheaper as compared with goods produced in other nations so as to promote its exports. China has prospered using this artificial subsidy for its exports and in the bargain raised a huge corpus of dollars in the form of a huge trade surplus. China has used this massive surplus to buy US treasuries.
Traditional economics suggests that a trade surplus implies that the nation is exporting more than it is importing and the demand for the domestic currency should be higher than the demand for foreign currencies. A higher demand for the domestic currency vis-à-vis the foreign currency implies that the domestic currency should appreciate. However, in order to provide an artificial kick to its industry, China had not allowed its currency to rise China’s silk road economic belt.
This abnormality seems to have been acceptable to the US till the going was good. However, now with the US economy in doldrums, US exports are uncompetitive against the Chinese products and the Chinese products are sufficiently cheaper to dent the domestic US industry as well.
Thus, the stage is set such that under immense pressure, China has started to allow the Yuan to appreciate, but not sufficiently fast to satisfy the US. The Yuan has appreciated continuously in the last few days and has strengthened to a fresh high of 6.7 to the US dollar. The appreciation in the Yuan has been prominent since the Chinese Central Bank announced on June 19 that it will allow greater flexibility in exchange rates.
However, the US does not seem to be satisfied with the pace at which the Yuan is appreciating. In a congressional hearing, the US Treasury Secretary stated that the pace of the rise in the Yuan has been too slow and the quantum of appreciation has also been limited. As per the Treasury Secretary, the US wants to explore multilateral ways in which it can persuade China to allow a more rapid appreciation in its currency.
While, the US may be talking from its own point of view in order to bolster its industry and sagging economy, a rapid appreciation in the Yuan could mean that China’s goods produced for exports become more expensive in the global markets. This could lead to a dramatic slowdown in the Chinese economy, which is one of the economies that is growing in times of a global slowdown. The appreciation of the Yuan, which could effectively lead to the migration of manufacturing capacity to other destinations, could help lift some of the sagging economies at the expense of China. However, it is quite unclear if this would be acceptable to China and how effective such a transference process can be to bring out several sagging economies out of their gloom.
All said and done, the misuse of currency manipulation by the Chinese to artificially subsidize their exports is an unfair practice and must be corrected at some point in time and now may not be a bad time to start it.