By: Jeannie Mark
For years, China has faced pressures from other countries such as the United States to allow their pegged currency to float thus allowing the Yuan to appreciate in value. Right now, China maintains a “dirty float” currency which means that the Chinese government takes actions to keep the exchange rate constant of their currency, the Yuan, against the American dollar. Many accuse China of monopolizing exports by preventing other countries to compete with their exports due to their cheap cost. Other countries such as the United States and United Kingdom cannot compete with the cheap labor and, subsequently, blame China for the significant decrease in jobs. They also accuse China of manipulating the global foreign exchange market by not allowing the Yuan to be fully convertible. The United States believes that allowing the Yuan to float freely, meaning that the Yuan will appreciate and depreciate in value based on supply and demand, will solve the imbalance in the global market and help increase exports from other countries. Due to the overwhelming pressure faced from other nations, China makes a decision about whether or not to allow their currency to be based on a floating exchange rate system. However, China has not changed its policy due to a huge possibility of their manufacturers moving to other countries thus causing millions of people in China to lose their jobs which will cause social and political distress. The country of China also fears that they will face the same fate as Japan, a period of deflation and stagnation for the economy, after they switched to a floating exchange rate.
So who will really be effected by this? Due to China wanting to keep their exchange rate pegged to the US dollar, China buys and invests a lot of money into US Treasuries. Buying these US Treasuries puts money into the American government, which keeps interest rates low. These low interest rates reflect on the United States housing market. In a nutshell, China buying US Treasuries keeps American mortgage rates low and allows people to buy houses more easily. If China switches over to a floating exchange rate, the Yuan will go up in value and cause a decrease in the value of the American dollar. Therefore, all the foreign reserves and Treasuries China has in its possession will essentially be worthless which will cause them to sell these reserves. Upon selling these reserves, the American dollar will inflate and interest will go up possibly causing another crash on the housing market. Additionally, if the Yuan goes up in value, this means that the Chinese people will be able to afford more imports thus causing an increase in the price of oil and petroleum.
China’s main concern, a huge increase in unemployment, will be the winning factor in this decision. Many Americans foresee a huge increase in employment if China allows their currency to appreciate. However, China does not directly compete with American jobs. The manufacturing sector of America has gone down due to rising and developing technology for the past decade. America focuses heavily on knowledge-based goods such as software and concepts. China heavily focuses on the more labor-intensive jobs thus posing a huge problem if their manufacturing companies move out of China and into cheaper countries. However, even with the pegged currency, the manufacturing jobs in China have been decreasing. Although China still remains to be underdeveloped in comparison to other countries such as the United States, the have seen an increase in technology as well. Therefore, one cannot say if a floating exchange rate will exactly have a huge impact on the jobs in China as well as the United States.
In the past years, China has allowed their currency to appreciate in value to slowly make its way to a floating exchange rate. Right now, they maintain a “dirty float,” with the government intervening when necessary to make sure the Yuan does not appreciate too much. However, the Yuan has appreciated by 25% in the past decade. Right now, China’s managed float has been the greatest choice given its economy and political regime. If they continue down this road, the switch to a fully floating exchange rate should be nearly seamless.