Three Misconceptions Regarding China’s Currency Policy

In both cases, a more highly-valued currency meant that Americans paid more for the goods which they did import, and my guess is that the composition of exports from Japan and China to the United States also changed. Exporting goods with more raw material content, for example, might more than offset higher relative labor costs because raw materials can be purchased more cheaply with a more valuable currency. In the case of China, a more highly-valued yuan has caused exporters to move to higher value-added products where labor content is much less a factor.

Misconception #3: China Will Yield to Political Pressure to Change Its Currency Policy

As the November elections near, and concerns about unemployment in the United States increase, calls for President Obama to “get tough” with China on its currency policy and to label the country a “currency manipulator” will become deafening. Anyone with any experience in China, however, knows that this will only delay any decisions the Chinese government might make to alter currency policy. Simply put, no Chinese leader wants to be seen as yielding to outside pressures on this issue.

Many analysts predict that China will once again allow the yuan to begin a gradual revaluation against the dollar by mid-year. If the dollar continues to gain ground against the Euro, I believe that China will release the dollar peg sooner rather than later.

U.S. politicians would be wise to stay quiet and let events play out.

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