This is likely due to my ignorance regarding economics, but a report on NPR yesterday detailed a bill out of the US Senate Finance Committee that would trigger tougher sanctions against China for currency manipulation. The main problem seems to be that the yuan is “undervalued” against the value it would have if traded on the open market.
My question is, why would the Chinese government deliberately undercut its currency? I presume it makes Chinese goods appear cheaper on world markets than they actually are, but isn’t that a good thing for potential buyers like the US?
I’m not looking for a political argument here, just a lesson in economics: What is the economic benefit of manipulating currency downward? I’d think the resultant inflation alone would make this an undesirable policy…
Sales benefit both parties. The US gets cheaper goods; China sells more goods, and hence gets more dollars. It’s basically the same reason why WalMart wants to sell things for less than its competitors: not because its customers get cheaper goods, but because it sells more of them.
Cheaper Chinese goods are a good thing for American buyers of these products, but bad for American companies which compete against Chinese manufacturers. For political reasons, China wants to promote exports; American policy makers, on the other hand, are under lobby pressure from groups who would benefit from less imports from China (most importantly, of course, American producers). Those who are in favor of cheaper imports just don’t have as astrong and well-organized a lobby as the manufacturers have, which is why you rarely hear about groups which support an undervalued renminbi (actually, “renminbi” is the name of the PRC currency; “yuan” is the name of one particular unit of said currency, similar to pound and sterling in Britain).
It is true that undervaluing your own currency bears the risk of inflation and makes imports more expensive. Yet, for some reasons, Chinese policy makers are willing to accept that, China’s economy is heavily export-oriented, and in spite of reforms, its domestic economy is still much more regulated and dominated by state activity than elesewhere. Domestiic effects of the low renminbi just have less priority on the agenda of Chinese policy makers.