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Manipulation of the Chinese Currency, or Americans Spending Beyond Their Means?

International Finance

Key Words International Finance and Currency Manipulation
News Story

The U.S. and China continue to battle over China’s manipulation of the yuan. To most critics in the U.S., Chinese central bank policy is a blatant attempt to make Chinese goods cheaper and more desirable on world markets. After much attention in the U.S. Congress and continued jawboning by American officials, at the beginning of May, 2006 it appeared that China was finally letting the yuan float against the dollar—so that the world market determined the yuan’s value without artificial intervention. As a result, the Treasury Department in Washington decided not to accuse China of manipulating its currency to obtain a trade advantage.

But only two days after the Treasury Department decision, the Chinese central bank has allowed its currency to once again weaken gradually against the dollar, despite urgings from trading partners to let the currency appreciate. To keep the yuan from rising against the dollar, China’s central bank buys more than $10 billion a month of foreign currency from the country’s companies and individuals, giving them yuan instead.

Even though April is normally a slow month for Chinese exports because factories have not yet stepped up the production of toys, clothing, and other Christmas season goods, the government reported a $10.46 billion trade surplus for the month. Rising exports in April indicate that global demand for Chinese goods is stronger than many experts had expected. “The Chinese trade surplus is not going to narrow significantly in the short term,” said Qu Hongbin, an HSBC economist who specializes in China for the England based bank.

Even with all the hullabaloo in the U.S. about the currency manipulation, the People’s Bank of China—the country’s central bank—has steadfastly maintained that the country’s trade surplus is a result of broad structural economic forces, rather than any result of the government’s decision to peg its currency to the dollar at a level that makes Chinese goods seem cheap by international standards. Zhou Xiaochuan, the governor of the central bank, has contended that China’s high savings rate means that China inevitably produces considerably more than it consumes, shipping the difference overseas. The urban savings rate for households in China approaches 50 percent while the household savings rate in America is near zero.

Xiaochuan may well have a point. In fact, the savings rate in America has been negative for the past four quarters. That means Americans are spending more on personal consumption than they are taking in as personal income. Much of this spending is going for Chinese goods and services.


Use any source available to define household savings rate. What would have to occur for it to be negative? What factors encourage household savings in countries like China and Japan?

2. Discuss how the Chinese government’s practice of buying dollars keeps the value of the yuan from rising.
Source Keith Bradsher, “Jump in Exports Widens China’s Global Surplus”, The New York Times Online, May 13, 2006.
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