Yuan- A Chinese Government Manipulation or Fairly Priced?

 I think that the devaluation of Yuan is a government manipulation.
Current Scenario: If we look at the graphs of previous years about the Yuan/Dollar exchange we can find that the Yuan has started to strengthen only after 2005. As the Chinese currency appreciated, the Chinese Government went against the market norms of keeping Foreign Exchange Rate dependent on the market place , as per the norms of a free market economy, and rather proposed to regulate the exchange rate. This devaluation of the Chinese currency was beneficial for the Government because now it could keep a larger dollar reserve that it gets from the exports. It is however not so useful for the American government as it not only increases the US Trade Deficit, but also the dollars earned by China are used by it to purchase US Bonds. It also benefits China because it can now bring more goods to the US market and maintain a competitive edge, also leading to massive job losses and continuous deterioration of US manufacturing base.

What happened in the past years?: Efforts have been made by America to restrict currency manipulation by China in the past. A bill was introduced in the senate in Feb 2005 to impose 27.5% tariff on all Chinese goods imported into US market. The voting was however put off because the Chinese government promised that it would change the fixed exchange rate to become a more flexible one.
Soon after in July 2005,China relaxed its current policy and the People’s Bank of China announced that it would introduce 2.1% increase in the value of Yuan from 8.777 to a dollar to 8.11 to a dollar. Also, that the Yuan will no longer be pegged to a dollar as it had been since 1994 but to a basket of currency. China halted the 21% ,three year advance in dollar in 2008 to weather recession in US. Government has kept the currency at about 6.8 to a dollar, this has affected other export dependent countries whose currencies have appreciated.

Recent Developments:
• On March 2010, 130 legislators wrote a letter to the new Secretary of Treasury, Timothy Geithner accusing China as a currency manipulator.
• On June 2010, China said it would gradually make the Yuan more flexible, so that it may deflect foreign criticism at next week's G20 summit. The European leaders have welcomed this decision of China saying that it would remove the global imbalance.



China’s Perspective: Why China thinks what it is doing is right for it?:
Pros: China has time and again objected to the blame that it has manipulated the Yuan to gain competitive advantage. According to an expert, most of the industries in China are running on 3-5% profit margins. In such a case, if Yuan appreciates by 1%, 20% of the industries are affected. They have to either increase the price of goods supplied to the clients or suffer direct loss. Similarly, an increase in 5% in Yuan means closing of 50% of the industries. Also for now China’s ability to export manufactured goods remain a vital growth prop and this export competitiveness will be affected by a strong Yuan. Also, given that there is a demand in wage increase by the labourers in China, appreciating Yuan will lead to multinational outsource their work to countries other than China.
Cons: There is however a fault in the way in which Chinese Government is operating. A close look at the whole process tells us that though inflation of Chinese Yuan or its devaluation is benefitting the American Importer, but it is harming the Chinese exporter because now the worth of the Yuan has decreased.

Conclusion- Lessons learned: Knowing the fact, that we have just come over a global depression, it won’t be very wise for countries like America to indulge in a trade war against China. Even so, global economic uncertainties may delay any Chinese move to revalue the Yuan.
At the end it can be said that any change in the currency exchange rate is entirely in the hands of the Chinese Government and is based on internal economic conditions. Because of the international pressure building up on China, its government may choose to appreciate its currency but no one is sure as to how it would affect the global trade. The government may choose to reduce the profit margins to keep the change under control. China is seeing double digit growth rate now and now appreciating the Yuan will lead to a decrease in its foreign reserve dollar and may lead to an economic slowdown.
China thus has to tread very carefully on the path that it has paved for itself. It has to balance the fear of growing inflation in the mind of its people with the decrease in the prospective foreign exchange reserves. Only time can tell us what lies ahead!
Thanks.