For years China has been successful in pegging its currency, the Yuan, lower against the US Dollar which is internationally accepted. Making its own currency weak made China the largest manufacturer and exporter of commodities in the world.
In today’s global economy Chinese supremacy seems inevitable. China has established itself as the sweatshop of the world as it provides one of the cheapest labour forces available, and hence manufactures most of the commercially marketed products available in today’s market. China registered approximately 10 per cent gross domestic product (GDP) growth year after year for the past three decades, though in the last three years it also has some slow down. Moreover, in 2010 China became the largest exporter in the world. In urban areas exports, production and fixed-asset investment are up to 32, 22 and 28 per cent, respectively. These numbers paint a pretty good picture for industrialists, consumers and other countries making China the ideal destination to invest. But there is one number with regard to China that is unassailable and that makes their growth miracle possible: 6.38 which is the value of converting one US Dollar into Yuan (Chinese currency). The Yuan has been pegged at this artificially low exchange rate compared to the US Dollar and this has become the cornerstone of the Chinese economic miracle.
It has been a mercantilist tool which proves to be a replacement of taxes and tariffs. This move of China of controlling and pegging the value of its currency down against the US Dollar allows the country to run an export-driven economy which in turn competes on prices, depends on foreigners’ propensity to consume and builds up a huge surplus for the country. China literally has become the Wal-Mart of the world, the big store and the category killer which is unwanted by the small shopkeepers in their neighbourhood. The opposite picture is that of the United States as well as Europe where consumer-based societies are facing huge structural deficits. Despite letting the Yuan not to be market controlled, China is very reluctant in altering the pegging of its currency against the US Dollar and most of the countries in the world oppose it. Apart from this macroeconomic issue which is entirely global in nature, China now is faced with several other issues within the country which can prove to be grave in the near future. One such problem which is definite is labour shortage in China and the workers unlike the yesteryears are refusing to work for peanuts. This phenomenon is particularly evident in the factories across different industries especially after the country revived from the global economic recession.
China of controlling and pegging down the value of its currency against the US Dollar allows the country to run an export-driven economy which in turn competes on prices, depends on foreigners’ propensity to consume and builds up a huge surplus for the country.
It is ironical for China that the exploited proletariat are demanding more material recognition for their hard work from the bourgeoisie, factory and industry owners, as it is a new phenomenon because China till date has been ruled by the Communist Party, and this capitalistic mode of rewards and accolades has overwhelmed the entire economy. This cannot be implemented because the margin of profit of each and every commodity produced is very low in China. To raise the margins, the prices have to be raised which will make the products less competitive in the international market and as the Yuan is not controlled according to the rise and fall of the global market, the exports will automatically decline which will then lead to a slow economic growth.
The flip side of the story is that the modern Chinese economic miracle would not have taken place without the US Dollar as its reserve currency. The US debt to China fluctuates each and every month depending on how much US currency China buys or sells. China has held more than $1 trillion in debt in 2011 and before July 2010 it held $843 billion. China is more than happy to hold a large part of its debt in US Dollars as it helps China’s economy grow by making its currency weaker in comparison to the US Dollar. On the other hand the United States allowed China the privilege to become the biggest banker because Americans enjoyed low consumer prices of the goods which are produced in China and it also helped the United States to maintain low interest rates back home. China strategically keeps the exchange rate of Yuan low by controlling it at a fixed rate of appreciation compared to the other currencies across the globe. When the value of the Dollar falls in the international market, the Chinese use their reserve Dollars to buy US Treasury bonds which in turn increases the demand for Dollars in the international market. This in turn pushes up the value of the Dollar. China then redeems the US Dollar in exchange of Yuan at a fixed rate which makes it the biggest banker and investor of the United States. This also gives China a huge political leverage. If even for once China sells a part of its debt holdings in the market, the value of the Dollar will go down and interest rate will rise resulting in slow economic growth of the United States. This scenario could be quite fatal as the world will witness another global economic crisis which can be even graver than the global economic meltdown of 2008-2009. The possibility of that happening is minimal because if China sells the huge amount of debt holdings which it had acquired over the years, it would devalue its own holdings. China also has allowed limited FOREX trading and controlled it tightly for so long. If China now wants to decrease the trade imbalance that it has with the United States it should allow its citizens to hold foreign currency and buy foreign assets which is less than negligible now.
With the uncertain condition of the world economy as a whole where countries like Greece, Spain and Italy are going through severe economic crisis, this silent war between the United States and China is synonymous to the Cold War between the United States and the former Union of Soviet Socialist Republics (USSR). The cold war resulted in the economic destruction of the former USSR dividing the once formidable country in fragments. The underlying tension which centres around the struggle for economic supremacy between the two behemoths, the United States and China, can end up in mutual economic destruction.
Ata time when economies like Ireland and Greece choked because of their intense debt crisis and the world at large is suffering from economic slump, the war between the United States and China over their currencies, may result in global economic imbalances and disparities which will further exacerbate the global crisis. What will be the Chinese strategy regarding the Yuan in the future? Will it be allowed to float freely without any restrictions from the Chinese authorities? Only future will tell.