South-Western College Publishing - Economics  
The Dollar vs. the Yuan
Topic International Finance
Key Words Yuan, Dollar, and the Exchange Rate
Full Article

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Reference ID: A163610639

News Story At a time when top American and Chinese leaders are preparing to meet in Washington the Chinese central bank has indicated a willingness to let the yuan fluctuate more freely in the foreign exchange market. Growing pressure from Congress to address the widening American trade deficit has raised talk of protective measures against China.

The Chinese move will not allow the yuan to fluctuate freely, but will allow a greater range of movement than in the past. The People’s Bank of China said in a statement posted on its website that it would allow the currency, known as the yuan or renminbi, to rise of fall up to 0.5 percent in each day’s trading. This is an increase over the previous limit of 0.3 percent.

The Chinese government actually broke the yuan’s peg to the dollar on July 21, 2005. However, the central bank has never allowed the yuan to move by the maximum percentage they have stated. The Chinese government allowed the yuan to rise 2.1 percent at the time they broke the peg, but has only allowed it to inch up gradually during the two years since then.

If the central bank did allow the yuan to rise more quickly against the dollar it would make Chinese exports to the U.S. more expensive to American buyers and at the same time make American exports more attractive to the Chinese. This is exactly what many members of congress are wanting. Especially members from manufacturing states that have lost jobs during China’s export boom of recent years.

If history is any indication, the U.S. should not expect a huge change in the relationship between the dollar and the yuan on currency markets. The People’s Bank of China has stated that it will continue to “keep the exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies. “ This rather ambiguous statement suggests that the central bank will continue to influence supply and demand for currency by intervening in the exchange market to keep the yuan where they want it.

Questions
Discussion Questions:
1. Explain what would happen if the yuan did rise against the dollar.
2. Use any source available to explain what is meant by the statement in the article about the Chinese government intervening in the exchange market.
Multiple Choice/True False Questions:
1. If the yuan were to rise against the dollar Chinese exports would become more expensive to American buyers.
  1. True
  2. False
2. The Chinese government has decided to allow the yuan to fluctuate freely on exchange markets.
  1. True
  2. False
Source Keith Bradsher, “China Slightly Loosens the Reins on Its Currency’s Market Fluctuations,” The New York Times Online, May 19, 2007.
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