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Wednesday, November 30, 2005

China and its yuan: open up

In capital hill politicians are becoming restless about the Chinese yuan. Except for a couple of months ago when the yuan was reevaluated by 2.1% it was fixed for the last 11 years against the American dollar at an artificially low rate. Across the country manufactures and workers are also upset at the slow rate at which China is allowing the yuan to become a freely traded currency and reach its real value. The Chinese said they would allow the yuan to appreciate as much as .3% a day however in the last three months its has risen by only .3%. An artificially low yuan is contributing to the trade deficit the United States has with china which has reached another record high at $162 billion last year. The critics say a free floating yuan would rise in value as much as 20% which would level what some believe to be a uneven playing field. The Bush administration also would like the Chinese government to crack down on counterfeiting of U.S. music, software and other goods which would also make the trade deficit smaller for the U.S. The U.S. is threatening to slap high tariffs on Chinese goods if China doesn't start making more progress.

There are benefits obviously but there is a downside for the U.S. as well. China is a big buyer of U.S. bonds if the yuan rose they might buy less bonds which could mean higher interest rates, higher mortgage rates and higher oil prices. If the yuan rose in value china could buy more oil and that would mean less supply and a higher cost for U.S.. Also in the short run the trade deficit might grow, with Chinese products costing more and American products costing less. However in the long run this would most likely mean a smaller trade deficit, and American manufacturing companies being able to compete a little better.

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