By: Dr. Mike Campbell 

There has been a long running complaint in the USA and, to a lesser extent, in Europe and Japan that the value of the Chinese Yuan has been kept artificially low against the Greenback. This means that Chinese imports in the US market have remained competitive in the US, helping to drive China’s growth after the worst of the global recession has passed.  The Chinese deny that they have artificially held the value of the Yuan down, but the facts don’t support this. Since October 2009, the US Dollar has fallen by 13.5% against the Yen, but it has only seen half of this depreciation against the Yuan (6.45%). Whilst the bold fact that the Dollar has appreciated against the Yuan may seem to support China’s position, the fundamentals of the two economies refute it.

Since 2009, China has overtaken Japan to become the world’s second largest economy behind the USA and has produced very impressive growth figures. If market forces were allowed free rein, the Yuan would be significantly higher against all of the major currencies and might be looked to as a safe-haven currency.

A bill has just passed the US Senate which seeks to apply pressure to China to allow the Yuan to appreciate. The bill has little chance of passing into law since it will be defeated in the Republican-controlled House of Representatives. The Republicans accept that the Yuan is artificially low, but take the view that such a bill may provoke a trade war which would be in neither nation’s interest. 

The Chinese take is that the balance of trade deficit between the two nations has little to do with the exchange rate. The trade surplus for last year stood at $273 billion in favour of China. Analysts put the Yuan at anywhere between 25 and 40% below its natural level – such a readjustment would have a profound affect on the competitiveness of Chinese goods in the American market.