China's currency is artificially cheap because they control the exchange rate. Why can't the U.S. do the same

Question

What is good for the goose is good for the gander. Could the U.S. make the yuan only worth 5 or 7 yuan?

The U.S. dollar floats. The Chinese Yuan doesn't. It doesn't seem to hurt China.

Answer 1

Your basic premise is wrong. China's currency may actually be artificially expensive.

Two currencies are at a fair value relative to each other when their respective economies are in external equilibrium (exports are approximately equal to imports) AND in internal equilibrium (unemployment is at a non-inflation accelerating level). You seem to be basing your reasoning on external equilibrium alone, while completely ignoring the internal equilibrium. China has an enormous frictional unemployment (every year, enough people move from countryside to cities to populate a city the size of Houston), so all things considered, its currency may well be overvalued.

Also, consider this. China consistently has a higher inflation compared to the U.S., yet the yuan is not losing its value relative to the dollar, which is a sign of the currency value kept artificially high (sort of like the Argentinian peso during the currency board period).

Answer 2

You need to understand how countries "control" their currency -- in reality those currencies float also. You can't deny the laws of supply and demand, and the Yuan doesn't maintain its value simply because the Chinese government decrees it -- no one has to pay any attention to that.

China's central bank buys and sells the Yuan on the markets, adding or reducing supply and demand for the Yuan as needed, so that the market clearing price is what they desire it to be.

If this was a good idea every company would be doing that with their products.

That is an expensive and risky policy that can have lots of side effects, and it usually hurts the people of the country when the currency is not allowed to move naturally. It either results in a country spending its hard-earned foreign reserves of other countries' currencies just propping up its own currency. For China I suppose it means they are printing a ton of Yuan and using them to buy the dollar and other currencies, in order to weaken the Yuan.

One way or the other these things come home to roost, and countries usually are finally forced to go off their peg during some economic meltdown it's caused. China can indeed get away with it for now -- but that won't last forever, and the U.S. is in a totally different situation in any case.

Answer 3

We could, but would we want to? China's yuan adheres to a managed float regime in which the yuan is tradable only for a basket of currencies including the dollar, yen, euro and won, at a rate that is allowed to change only by a certain percentage per day. This effectively ties up Chinese monetary policy as any daily changes outside of the float boundaries must be countermanded by monetary interventions.

While the U.S. gives up the ability to control the exchange rate, it does maintain the ability to influence interest rates, which is arguably preferable given the small size of the import-export sector. Yes, it is true that much of our consumer goods are imported, however the bulk of business services and goods consumed in the U.S. are domestically derived. The perceived benefit of controlling (and I'd assume strengthening) the dollar would be a decrease in relative prices of imports, although this creates a symmetric and complimentary increase in the price of exports, which hurts competitiveness.

The U.S. could return to a managed float regime, as we last had under the Bretton Woods Convention. The consequences would be a bit more complicated if we did so, however, given the importance of the U.S. dollar across financial markets. Consider, for instance, the LIBOR (London InterBank Offer Rate), which is the floating interest rate most commonly used by financial markets for pricing variable-rate loans and securities. LIBOR, despite being based nominally in London, describes the rate on dollar-denominated commercial paper between banks. Were the U.S. to levy a managed float on the exchange rate, a large multitude of contracts (swaps, futures, etc) would have to be re-negotiated or re-priced (since the risk of the underlying rate has changed).

Answer 4

I suppose so.

But, I must add that I have been in two countries where the government controlled the exchange rate. There was a raging black market in both countries. In one of the countries the black market was paying 2.3 - 3.1 times what the government directed. Needless to say, I change my money with the black marketeers.

If you go back to the late 70s under President Carter you can see what happens when the government of a capitalist nation tries to control wages and prices. The inflation rate went absolutely nuts with figures falling in the upper teens. Yes sir, 17% and 18% was what the US was dealing with. I don't see a big difference between wage and price control and exchange rate control.

Some things are not the domain of government and IMO exchange rates fall solidly in that area. To be fair, I am a Capitalist. I believe that the less the government dabbles in the economy the better it works. A national enonomy is a terribly tangled web. When one pulls on one thread the whole web shakes. It seems to me that when ever the government acts to correct some problem, real or perceived, the resulting distrsess requires ever more and more and more government intervention.

I prefer it when the market is allowed to find its own level. Anything else is artificial and generally temporary.

Answer 5

I think China artificially controls the exchange rate by holding down the value of the Yuan. Looks like our fed is doing a pretty good job of tanking the dollar themselves by lowering interest rates. I just saw an economist on CNN talking about how the low value of the dollar is great for "exporters".

Answer 6

Um.. The United States is doing that.. Problem is - it isnt a good thing.. We don't make anything in this country anymnore, so a weak dollar benefits only a few manufacturers that are still alive in this country and perhaps its a small shot in the arm to tourism.. with the ridiculous notion that this small influx of tourist will help local economies..

The dollar is shrinking against all currencies.. Our once great country is turning into a weak and apathetic nation.

Two years from now, dont be surprised if its less expensive to wipoe your *** with a dollar than to go out and buy toilette paper..

Answer 7

Well, we're about to experience the benefits of a sinking dollar. Any company that handles real estate for foreign investors of exports a significant amount of goods to a foreign market is about to have a banner year.

Also, those people who have always whined about manufacturing jobs going overseas? They are about to come back!

Answer 8

Why not? Americans want to control every country but their own... please tell me this question is a joke!

Edit: While your at it, make the British Pound worth 50 cents.