imbalances

The Yuan Can What Dollar Cannot

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The two great world powers, China and the United States, are sparring real time on the value of China’s currency, the yuan.

The two great world powers, China and the United States, are sparring real time on the value of China’s currency, the yuan.

Tectonic plates are colliding, and the world awaits the one who blinks first. The two great world powers, China and the United States, are sparring real time on the value of China’s currency, the yuan. At the centre of the dispute is the American claim that the yuan is artificially undervalued, and by as much as 40 per cent, which hurts American and world competitiveness in trade. The undervalued currency, the US argues, allows China to flood the world with exports that are impossible to compete with on price. The Chinese, on the other hand, argue that the real issue is US profligacy, specially America’s fiscal deficit which is virtually underwritten by China’s purchases of US Treasury bonds with money it earns on exports. Recently, when the US Treasury Secretary delayed a report due to Congress that would have labelled China a ‘curency manipulator’, observers sensed a compromise.  The report would have set in motion a process that could slap economic sanctions against the People’s Republic, thereby jeopardising the world’s most important trade relationship. The fact is, the US does not know how the Chinese might respond. China is America’s biggest creditor, and  it maintains that  the yuan’s value is an internal issue that impacts its domestic economic stability. The first round of power play is on, and the stakes could not be any higher. And this is but one of many challenges the US faces as the lone superpower after the Soviet Union was done in.