What Happens to Other Exporting Countries If the Chinese Yuan Is Artificially Cheap?

The United States is literally pleading that China should stop controlling its currency, the yuan, and thus let it “naturally” rise in value. To the average person, this topic seems to be too abstract to understand and appreciate. However, in this article, we will talk about why the West, especially the US, has got their panties in a bunch over the matter.

Almost all currencies in the world are valued with respect to the US dollars, and their relative value is called the exchange rate. In this context, seven Chinese yuan is roughly equal to one United States dollar. Almost all currency exchange rates are determined by market-dictated factors. However, in the Chinese yuan’s case, it is pretty much fixed.

For example, suppose that I am a China-based electronics exporter whose primary market is the United States. Furthermore, suppose it costs me seven thousand yuans to manufacture a single computer set, which is to be exported to United States at ten percent profit. At seven yuans to a dollar, I can sell my computers at USD 1,100 each. However, this assumes that the actual exchange rate is really at 7 to 1.

The West, led by the United States, contends that the real value of the yuan much higher than that, say, to a tune of 5 to 1, i.e. one needs less yuans to get a single dollar. At an exchange rate of 5 to 1, the computer that I would have sold at USD 1,100 will now be re-priced at USD 1,540. That is, my exports to the US will cost more that it would, thus translating to lower sales revenues.

However, China remains adamant about their national currency policies. Hence, I get to earn more yuans if I export stuff to the US because of this currency peg. This hurts exports from other countries because these other countries have a free-floating currency, i.e. their currencies, unlike China’s, are not artificially controlled.

Thus, a controlled Chinese yuan, that is, an artificially cheap Chinese Yuan, hurts other countries because it gives Chinese exporters a certain competitive edge with end-product pricing, which should not have been there to begin with.

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