Impacts of China’s currency

Date posted: February 22, 2011

China’s president recently made a state visit to the United States, and there were numerous headlines about China’s currency and its impact on world trade. N.C. State University economist Mike Walden explains.

“Well, one of the issues that many people have with China is that we run a large trade deficit with China. That is, we buy a lot more from China than we sell to them. And some say, I won’t go that far, but some say that’s costing jobs here in the United States. And so many in our country would like to see that deficit get smaller.

“And one of the factors behind the deficit, they argue, is that China does not let its currency rise to its natural level. Now well what does that mean? Well, a currency has a value against other currencies — just like the price of milk against the price of bread. And China’s currency has generally not been allowed to sort of seek its own level. Many think that China’s currency is undervalued. If it were to go higher, what this would do is it would make China’s consumers — because their currency is now worth more — better able to buy products from countries like the U.S. So it would serve to increase our exports to China. It would also make China’s exports to us, what they sell to us, more expensive. And therefore we would buy fewer of those. And so a higher valued Chinese currency would serve to reduce — not necessarily eliminate, but serve to reduce — that trade deficit we have with China. And our country and our policy makers have been working with the Chinese and encouraging them to again let their currency value seek its own level.”

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