Chinese “Yuan” Up on America

China has kept its currency, the yuan, pegged to the U.S. dollar for over a decade at around 8.28 yuan to the dollar. While America’s trade deficit has burgeoned and the dollar declined, the U.S. has long asserted that China’s fixed exchange rate policy was undermining American manufacturers. The theory was that if allowed to float freely in the marketplace, the yuan would be substantially stronger against the dollar, thus making China’s exports relatively more expensive. In turn, American consumers would be less likely to buy their products and American manufacturers would be more likely to sell theirs. Hence, the trade deficit would improve.

Last year, U.S. imports from China were $196.7 billion while exports to China were only $34.7 billion, resulting in a staggering trade deficit of $162 billion—equivalent to $444 million per day. The U.S. trade deficit with China is larger than its deficit with all of Europe and larger than its deficit with Canada and Mexico combined.

In a report to Congress on May 17, the Treasury Department warned China “that its currency policies were distorting world trade and it brandished the threat of retaliation against the country’s exports [i.e., tariffs] if Chinese leaders did not change course in the next year” (New York Times, May 17). The Bush administration also said “Beijing would have to make changes of ‘a manner and magnitude that is sufficiently reflective of underlying market conditions’” (ibid.). Meanwhile, Federal Reserve Chairman Alan Greenspan told the Senate Budget Committee in April that China’s peg was beginning to have a detrimental effect on the Chinese economy.

On July 21, China abandoned its peg to the U.S. dollar and announced that the new rate, initially, would be 8.11 yuan per dollar—a change of only 2.1 percent; well short of the significant adjustment that Washington was looking for. (Economists estimate that the yuan is undervalued by anywhere from 10 percent to 40 percent). However, by abandoning its peg to the dollar, China allows itself the flexibility of further revisions as it deems appropriate. And there’s the rub.

China, like any nation, acts primarily in its own self-interest. The peg was beginning to hurt its economy. The relatively small revaluation will not likely have any significant impact on America’s trade deficit with China. Much of what China sells to the U.S. is comprised of components that it imports from other countries; the slightly stronger yuan means those parts will be a little cheaper for them to buy, so the net impact on export prices is very small—a drop in the bucket.

Even though the yuan is no longer pegged to the U.S. dollar, China will continue to manage the value of its currency to its advantage. It won’t let it appreciate too much too fast, because that would threaten export prices and growth, which could lead to more unemployment—a big problem for a nation of 1.3 billion people. On the other hand, letting the yuan appreciate should help curb inflation, make it easier to manage monetary policy and not obligate China to continue buying up huge amounts of dollars to keep the yuan artificially low.

China has already accumulated a stash of about $600 billion in dollar-denominated securities—enough to buy every major oil company in the U.S., if it could. The Chinese have more dollar reserves than they really need. To the extent the yuan is allowed to appreciate against the dollar, these securities become less valuable and China has even less incentive to buy more, which means it could become more difficult for the U.S. to finance its deficits. Interest rates would have to increase sufficiently to attract the needed funds and the debt-laden American consumer would be hit very hard.

Paul Craig Roberts, who was assistant Secretary of the Treasury under U.S. President Ronald Reagan, put it this way: “When China’s currency ceases to be undervalued, American shoppers in Wal-Mart, where 70 percent of the goods on the shelves are made in China, will think they are in Neiman Marcus. Price increases will cause a dramatic reduction in American real incomes. If this coincides with rising interest rates and a setback in the housing market, American consumers will experience the hardest times since the Great Depression” (American Conservative, July 4).

Only within the last 20 years has the U.S. become a debtor nation—today, it is the world’s largest at that. Now it finds itself in quite a predicament, with China having substantial leverage over the U.S. economy. As China moves forward, balancing the pros and cons of letting the yuan appreciate, it will not hesitate to act in its own best interests, regardless of the consequences to America.

Bible prophecy indicates the U.S. economy will collapse. Yet ultimately it is not merely poor economic choices that will precipitate this disaster. It will be a curse brought about because America has turned its back on God, the one who blessed it with abundance and prosperity in the first place. You need to request our free book The United States and Britain in Prophecy if you really want to understand.