A Weak US Dollar in Not in the Long-Term Interest of China

Since July 2008, China has kept the value of Yuan close to 6.82 per US dollar, oscillating around very narrow band. And like the dollar, the Renminbi has been falling against other currencies, not only undermining the reduction of global imbalances but also making exports from other countries less competitive against cheaper Chinese products.

Indeed, with the greenback declining, the fixed exchange rate of the renminbi pegged to the US dollar has been making the Chinese currency fall against euro and yen. And with the trade-weighted value of Yuan declining, Chinese exports are becoming more attractive and foreign goods more costly in China. In fact, since March 2009, when dollar exchange rate started declining, Chinese exports have been steady rising. And there is no doubt that the increase in exports is boosting GDP, creating jobs but also preventing decline of global imbalances.

Yet, in the long run, the policy of keeping the Yuan undervalued is not sustainable and may have a negative impact on Chinese economy. After all, China needs to import raw materials from abroad and a weak currency makes imported products more costly. Eventually, Chinese companies will need to raise prices to cover costs and make profits. This in turn may bring the danger of inflation and depress spending among Chinese consumer

Anna Fedec, contact@tradingeconomics.com
11/4/2009 11:14:39 AM