South-Western College Publishing - Economics  
Legislation Would Penalize China
Topic International Finance
Key Words Currency Markets and Value of the Yuan
Full Article

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Reference ID: A164914724

News Story A proposed bill by four leading senators would legislate action against China for continuing to support its currency in the foreign exchange market. The four senators, Max Baucus, Democrat of Montana, Charles E. Grassey, Republican from Iowa, Charles E. Schumer, Democrat from New York, and Lindsey Graham, Republican from South Carolina hope their bill will persuade the Chinese to voluntarily change their currency practices before any penalties are actually imposed.

The senators had withdrawn a tougher version of the bill last year under pressure from the administration. The Bush administration has taken the position that it is better to negotiate with China rather than penalize them.

Clay Lowery, the Treasury Department’s acting under secretary or international affairs said, “We believe that the best way to engage China on these issues is through dialogue and negotiations, and not necessarily through legislation.”

Since no progress has been made the four senators introduced their new bill which would create an elaborate mechanism to punish China if it did not change its policy of intervening in currency markets to keep the exchange value of the yuan low.

Senator Baucus commented on the bill saying, “This bill requires the Treasury Department to take firm but fair action when other nations play games with the U.S. dollar.” He said the bill would pass by “a veto-proof majority in the House and Senate.”

As China continues to manipulate the value of the yuan the low currency exchange rates spur the country’s exports by making them cheaper for foreign consumers. With fewer dollars capable of buying more yuan, Chinese products are relatively less expensive for American buyers.

China uses its increased export revenue to intervene in the foreign exchange market and keep the value of the yuan artificially low.

Although the yuan has appreciated by about 8 percent in relation to the dollar since July 2005, economists predict that if it were allowed to float in the open market it would appreciate by at least 20 to 30 percent.

Questions
Discussion Questions:
1. Use any source available to research and discuss the process of currency manipulation and how China supports the yuan.
2. Visit http://www.iht.com/articles/2005/10/10/business/trade.php and discuss why some do not favor legislation that punishes China for currency manipulation.
Multiple Choice/True False Questions:
1. A lower priced yuan on foreign exchange markets makes Chinese goods cheaper.
  1. True
  2. False
2. China uses the revenue it gains from exports to manipulate the value of its currency.
  1. True
  2. False
Source Steven Weisman, “4 in Senate Seek Penalty for China,” The New York Times Online, June 14, 2007.
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