1) China is accused of manipulating its currency, the renminbi (yuan), by keeping it artificially low to boost exports. Economists estimate the yuan is undervalued by 25-40%. 2) By keeping the yuan low, Chinese exports become more competitive on the global market. This allows China to pursue an export-driven economy and accumulate a large trade surplus with countries like the US. 3) The US would benefit from a higher yuan as it would make Chinese goods less competitive compared to American products. However, China's $3 trillion holdings of US treasury bonds give it influence over US monetary policy for now.

1. Forrest Johnson
China’s role in the global economy has often been met with criticism and controversy. Its
induction into the World Trade Organization was violently protested in Seattle in 1999. Its role in
Africa as borderline and sometimes blatant exploitation of resources and governments has been
criticized by scholars and economists. Its working conditions and environmental standards (or lack
thereof) have also been called into question. One area of economic policy that has been greatly and
fiercely debated is the discussion over China’s currency, the renminbi. The general consensus
among prominent economists is not that China is manipulating its currency to keep it artificially low,
but how low it is actually undervalued. In his article Peter Navarro claims that the yuan is
undervalued by anywhere from twenty-five to forty percent. Before any discussion of what the
Chinese have to gain by their undervalued currency or what the United States could gain by forcing
the Chinese to accurately value their currency, it must first be determined whether or not the
Chinese are participating in currency manipulations.
In his article for the Peterson Institute for International Economics, Joseph Gagnon
provides a definition of currency manipulation as “when a government buys or sells foreign currency
to push the exchange rate of its currency away from its equilibrium value or to prevent the exchange
rate from moving toward its equilibrium value.” (2012) It is no secret that China has a strikingly
large positive trade imbalance with the United States. Given normal market forces, this would cause
the two currencies to self-adjust to better address this imbalance as to decrease Chinese exports to
the United States and level out trade. However, China has been using its trade surplus to purchase
United States Treasury notes, therefore extending credit to the United States and therefore allowing
the trade imbalance to continue and even increase. Like a credit card that continually increases its
credit line, China knows that by increasing the credit line of the United States, it is stockpiling cash
for future endeavors. According to Navarro, that credit line is roughly three trillion dollars (2012).

2. That is three trillion dollars of United States currency that belongs to China. Those three trillion
dollars are keeping the yuan undervalued exactly how Gagnon describes currency manipulation.
Since the conclusion can be reached that China is in fact manipulating its currency, the next issue
that must be addressed is what the Chinese have to gain by maintaining an artificially low currency.
In simple economic terms, having a weaker currency should lead to more competitive
exports. Japan and West Germany have often pursued monetary policies to make their export-
driven economies more competitive by ensuring their currencies do not rise in value. This is more
difficult now for Germany as it is a member of the Eurozone and therefore has somewhat less
autonomy over fiscal policy. China has taken that concept to great lengths in order to push their
export driven economy and they have pushed it to the previously stated tune of a three trillion
dollars of American debt. Clearly a three trillion dollar debt theoretically allows China a significant
say in United States monetary policy. It is a say that could in fact be weakened by inflationary
policies since three trillion dollars becomes less valuable as inflation sets in. To quote cartoon icon
Scrooge McDuck as he bid good night to his beloved money bin, “Don’t let inflation bite!” This is
the situation that China finds themselves in. Those US Treasury bonds they continue to purchase so
aggressively have bought China a wealth of soft power that they now yield in every corner of the
world. But that soft power is still built on a strong US dollar and those dollars are bought,
essentially by weak yuan.
A quick look at the opposite end of the issue and the reasons behind the United States
wishing for a fair market renminbi are also obvious. A stronger renminbi would make Chinese
goods less competitive, which is what has led Congress to seriously moot legislativemeasures that
would increase tariffs on Chinese goods in order to make up for the undervalued yuan. A stronger
renminbi would also provide more purchasing power to Chinese citizens as well. It would
strengthen what is already the world’s largest consumer market based on population. In Navarro’s

3. piece he highlights the millions of US jobs that have been lost because of unfair currency valuations
(as well as other policy matters including lack of environmental controls and human rights). When
faced with the option of buying a Chinese made good and an American one, very few (if any) would
chose the import when prices are a greatly reduced part of the equation. Therefore it is in the
United States’ interest to force China to allow a freely floating currency. Although there are
currently three trillion reasons why the US cannot push China too hard on anything.
There are other potential adverse effects on China to a stronger yuan as well. Hayes points
out in an essay that should a stronger yuan replace the dollar as the main international reserve
currency it could lead China to have many of the issues the effect US Treasury policy, such as being
required to produce enough “redbacks” (as he refers to renminbi) to be circulated. He also points
out the Triffin Dilemma as a reason China may be loath to allow increases in yuan used as reserve
currency, since it states that countries whose currency is a used for reserves usually runs a trade
deficit. One major, overlooked issue into why a weak renminbi benefits the Chinese government is
that while it keeps exports competitive, it also is depressing Chinese per capita gross domestic
product. As for why a state would want to depress its per capita GDP, a possible explanation comes
from Reuters correspondent Sebastian Tong. He cites research conducted by a Russian investment
bank that examines the link between per capita GDP and democracy. According to their research,
states that reach a per capita GDP of $6,000 have a ninety-nine percent chance of becoming a stable
democracy. That could be the real reason behind an artificially depressed yuan, a depressed yuan
will keep the Communists in power longer.