South-Westerns' Economic News Summaries
U.S. Reactions to China's Revaluation
Subject Chinese Currency
Topic International Finance
Key Words

Revaluation, Appreciation, and Protectionism

News Story

China announced that it will allow the yuan to appreciate gradually over time against the U.S. dollar as it moves towards a flexible exchange rate policy. The initial rise in the yuan will be about 2 percent against the U.S. dollar.

Treasury Secretary John W. Snow called it "the start of an awfully important process. It is very positive. I am particularly struck by the commitment of the Chinese government to get their currency into alignment with market forces." Yet the ambiguity of the Chinese announcement to remove the long-standing peg of the yuan to the U.S. dollar leaves a lingering question with U.S. administration officials. Is it a real change or just a token gesture?

One senior Bush administration official noted that Chinese leaders continued to describe their currency policy as "managed." Due mostly to a large and growing trade deficit that could reach $180 billion in 2005, anti-Chinese sentiment in both parties--and in both houses of Congress--runs high. Some free-trade advocates appear prepared to join the protectionists to vote for new restrictions on Chinese trade.

"It is a good first step, albeit a baby step," said New York Democratic Senator Charles E. Schumer, co-sponsor of a bill that would threaten China with steep tariffs on its exports if China did not significantly change its currency policy. "If there are not larger steps in the future, we will not have accomplished much." With the yuan estimated to be undervalued by at least 15%, political tensions are likely to remain high as American officials deal with complaints related to the piracy of American technology and entertainment, restrictions on American investment and a host of other issues. "The overwhelming sentiment of the nation, which is reflected in Congress, is that we should be taking a more aggressive stance and holding China accountable to world trading standards," said Maryland Democratic Representative Benjamin L. Cardin.

C. Fred Burgsten, President of the Institute of International Economics, thought Chinese leaders were simply hoping their hesitant first step on currency policy would result in a lessening of both political and financial pressure. "My guess is they are trying to see the minimum they can get away with," Burgsten said from this policy research organization in Washington. "My own sense, based on historical experience, is that this won't do anything to reduce either kind of pressure, and in fact, it might increase both kinds of pressure." Representative Phil English, a Pennsylvania Republican and sponsor of a bill that would retaliate against government-subsidized exports from China, was skeptical as well. "If this is a last best offer," Mr. English said, "it is unacceptable."

Fed chairman Alan Greenspan said the recent revaluation of the yuan was a cautious step toward a more market-based economy. "I think they've been cautious, and I think admirably so, but I look at it as a first step in a number of further adjustments as they invariably increase their participation in the world trading market."


Define the term "protectionism."

2. Discuss how Senator Schumer's tariffs will affect Chinese exports to the U.S.
3. Discuss how a flexible exchange rate system works. Do you think that the Chinese are truly moving towards a flexible exchange rate system?
Source Edmund Andrews, "U.S. Calls Revaluation a Good Start for Beijing," The New York Times Online July 22, 2005.

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