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July 26, 2010

China's currency move

Recently China indicated it would let the value of its currency fluctuate more frequently. Why did this happen? And what impact will it have in the United States?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"This actually could be very important. ... China, as most people know, runs a big trade surplus. That is to say, they sell a lot of products and goods to other countries like the U.S., and we sell some back to them but not nearly as much. And other countries think, rightly or wrongly, that this takes jobs away from them. And so China has been under pressure to do something about this, or else they may face what we call trade sanctions -- ... other countries saying, 'Hey, we are going to make it harder for you China to sell products in our country.'

"What China did with their currency by allowing it to fluctuate is that this will likely mean China's currency, the yuan, will actually go up in value against other currencies. Now what that will mean is it will make Chinese exports like to the U.S. more expensive. So things that are made in China and sold here in the U.S. will become more expensive, so we will likely buy less of them. And it will also make our exports to China less expensive for the Chinese to buy. So this should result in a slightly lower trade deficit from our perspective with China. Now it is not going to wipe it out, but it will likely be lower. Economists disagree on to what degree that trade deficit will get smaller. But this in some eyes is a step in the right direction for China to simply allow its currency to seek its own competitive value because before that they actually controlled directly that level."

Posted by deeshore at July 26, 2010 08:36 AM