There is currently a tension between the American currency and the Chinese currency. The Americans claim that the Chinese manipulate their currency to have more advantages in the trade. The Americans believe that the Chinese devalue their currency to benefit more in the trade. Devaluing of currency means that the Chinese sell their products to the Americans at a very low price, but they sell American products in China at a high price.
The Americans argue that the Chinese have devalued their currency about 20% to 40% against the dollar. Thus, making the Chinese much more advantageous in the trade. The US’ trade deficit with China is currently the biggest deficit US has compared to any other countries. On the other hand, China has a very high surplus with the U.S., which is currently 250 billion dollars, which is the largest among any other countries.
Surplus occurs when a country exports more than it imports. China is currently in surplus simply because most of the products in every country are imported from China. Because there is greater demand for Chinese products, the Chinese yuan would appreciate. Appreciation is the rise in value of a currency in terms of another currency in a floating exchange rate system. When a currency appreciates, it would cause the situation to switch – the exports would drop, wile the import would rise since appreciation would cause the Chinese yuan to become more expensive for foreigners.
The idea is that surpluses and deficits tend to self-correct over time. However, China has been in surplus for a long time, so the U.S. claims that China devalues its currency to keep the country in surplus. Countries, of course would rather be in surplus than in deficit. A problem with that though, is that if one country is in surplus, another country is in deficit, which is the situation of China and the U.S. right now. With China’s actions, the U.S. is very much affected since the U.S. have to cut down some jobs, thus causing unemployment and slow economic growth. Instead of helping the U.S. which is currently in deficit, the Chinese is making the U.S.’ situation worse. Countries in surplus are supposed to help countries in deficit by investing their money to them.
Instead of letting the Chinese yuan appreciate, the Chinese devalue their currency by making their currency depreciate. Depreciation is the lowering of the value of a currency in terms of another currency in a floating exchange rate system. One way that the Chinese could depreciate their Chinese yuan is by supplying more of their currency. The Chinese need to supply more of their currency since they keep their currency low and weak to make foreigners demand for it. If the Chinese yuan is relatively cheaper than other currencies, foreigners tend to buy them.
The graph above shows how the Chinese yuan depreciates. Since the RMB is weak and the dollar is strong, more RMB is put in the foreign currency market, so the Chinese supplies more of their currency. An increase in supply of currency causes it to depreciate.
Thus, China’s decision to devalue their currency is very selfish since other economies are affected by the decision. One country’s surplus is another country’s deficit. This is an unfair movement since countries in surplus are supposed to help countries in deficit.