China's Manipulation

China and It’s Manipulated Currency

                         As has been discussed in class, countries can choose a variety of ways in which they determine the value of their currency.  A country may chose a fixed rate system to be sure of the value of its currency at any given time and have the ability to predict what that value may be in the near future. Yet this plan lacks flexibility and the ability to adopt any kind of monetary policy. A country may also choose a flexible rate system; allowing their currency to float on the open market. No matter what the choice is, the value of a country’s currency and the price of their domestic goods abroad and the price of their imports will highly depend on which system they choose and how that system determines the value. While most countries let their currency float in the market and adapt to the changes in depreciation and appreciation, some countries do not. There has been a lot of criticism coming from the international community towards China. Many say that China is flip=flopping between systems and using other means of manipulating its currency in order to gain a favorable trade advantage in the world.

            People may ask, “What is the advantage of China having a low-valued currency?”  The answer is that, with a depreciated currency, Chinese-made goods will cost less (and sell more) in foreign countries ultimately making them more money and allowing them to obtain a very high trade surplus. Yet how does China keep its currency at such a low value? Doesn’t it float on the open market? Shouldn’t it naturally change and increase as they gain more and more of a trade surplus? The answer is that China uses the money it makes from its exports to buy foreign currencies (mostly U.S. dollars) and keep them in higher demand, thus making them worth more. In addition, China’s currency is pegged to the U.S. dollar. So, as China continues to drive the value of the dollar up, the value of its own currency will be relatively less. China can thus keep their currency at a desired value simply by buying U.S. dollars.

There continues to be criticism of China’s monetary policy in the international community. It has come to the forefront of many political debates both here in the U.S. and across the globe. While there may not be any way to take direct action yet, it is time for world leaders to come together and hold China accountable for the way they have continuously manipulated their currency in order to gain and hold an unfair advantage over international trade. There must be a mechanism put in place that allows the IMF to take swift and decisive action to stop these kinds of policies.