Currency Devaluing in China Could Spell Trouble for America

Earlier this month, Chinese authorities made a decision to drop the value of the Chinese currency, or renminbi (same as the yuan), to 6.36 to the U.S. dollar at the end of the business day on Tuesday, August 11th. According to this article from the New York Times, this is the largest devaluation of Chinese currency since the new modern exchange rate system was adopted by the country in 1994.

Unlike the American dollar, Chinese currency is decidedly valued every day by the Chinese government. Consumer spending in China has been declining over the past few years, but has been especially low this summer. Also, Chinese stock markets saw a big drop this summer, which further added to the decrease in consumer spending. In effort to boost spending, the Chinese government has been lowering the value of the renminbi. With a less valuable currency, Chinese goods become cheaper to buy. This is where the problem lies for U.S. manufacturers. As the value of the renminbi decreases, Chinese exports become cheaper for other countries to buy. Therefore, American manufacturers suffer because they cannot compete with the competitive Chinese prices. This ends up in a lot of job loss for those working in the manufacturing business. The benefit of having a less valuable renminbi is that Chinese imports to the U.S.  become less expensive, but that does not fix the problem for our manufacturing companies.

Our country's relationship with China is a very crucial one. We depend on China for a lot of trade and business. That is why it is hard for the United States government to intervene with the People's Bank of China and admonish them for their deliberate devaluing of the renminbi in order to help their manufacturing sector, despite the problems it ends up creating for the U.S. economy. Also, Chinese currency is not traded freely. The Chinese exchange rate policy works in which Chinese exporters receive U.S. dollars for their goods and those U.S. dollars come in to China and are converted into renminbi. So with China in complete control of its currency and trading, it makes U.S. intervention a very risky task.

For now, the Obama administration will most likely continue to use what the Treasury calls "quiet diplomacy" when dealing with China and its trading policies, in order to avoid major trade issues for the U.S. This goes to show how interconnected our global economy is and how much the economic prosperity of the U.S. depends on other countries.