USA Declares That The Chinese Yuan Is Undervalued

By: Dr. Mike Campbell

If anybody charts the values of currencies over time, as I do, it becomes very clear that the Chinese Yuan has been fixed in value to the US Dollar. The relative standard deviation of the value of the Dollar to the Yuan is just 0.29% for the period from late August 2008 to last week and the average value has been 6.8178. Of course, the Chinese government claims not to interfere in the money market to keep the Yuan artificially low.

The US Secretary of the Treasury, Tim Geithner, speaking to a committee of Senators stated his belief that the Yuan was significantly undervalued. A weak Yuan acts as a subsidy on Chinese exports, making them artificially cheaper and so more attractive. On the other hand, it acts as a barrier to imports from America, say, since they are relatively more expensive within the Chinese market. The Chinese have loosened the ties between the Yuan and the Dollar since June, but the appreciation against the Dollar has been just 1.9%. Over the same time period, the Dollar has fallen by 6.6% against the Japanese Yen. Of course, the Chinese economy is doing the best of all the world’s major economies in terms of output and growth right now. These facts should have pushed the value of the Yuan significantly higher, had it been allowed to float freely.

Geithner said that the US government would be exploring the tools available to it both domestically and through co-operation with other nations that could be used to encourage China to allow the Yuan to appreciate to a more realistic level. The issue is likely to gain prominence as the US heads into mid-term elections in November.