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China Must Stop Subsidizing the US Dollar
by Marko Marjanović (author of the new Checkpoint Asia site) for The Saker blog
For decades now China has kept its currency undervalued to the dollar and the US and China have both acted as if this was a boon to China. It is anything but.
Yes, by keeping the yuan low China makes it easier for its good to compete on the American market, but only at the cost of leaving money on the table in every trade. What artificially undervaluing yuan really does is it artificially increases the purchasing power of American consumers and decreases the purchasing power of Chinese consumers.
If yuan is artificially undervalued by 20 percent it follows that an American import company looking to buy goods in China to sell on the American market is able to get 20 percent more than it would be able to in full market conditions. What this means is that the Chinese government intervenes in the market to make Americans better able to outcompete domestic Chinese consumers in the market for China’s own goods.
How in the world is that beneficial? Now, it is true that undervaluing your currency is part of the standard East Asian development strategy previously also used by Japan, Taiwan, Singapore, Hong Kong, and South Korea to successfully develop their economies, however it does not follow from that that every aspect of that strategy is beneficial. To develop one does not need to get everything right, but just a few things. And to race ahead of others one only needs to get more things right than the others. For sure, China has gotten many things right, but pegging yuan to the dollar at an artificially low rate is not one of them.
With a free-floating yuan that was allowed to appreciate to its real market value the Chinese would get to enjoy more of what they produce themselves (ie would enjoy a higher standard of living), and the profits in trade would not be affected a great deal at all, because the reduced volume of Chinese goods which was still going to the US would command a higher price, that same price which they command in yuan.
Instead we have the situation where a developing country has been for the longest time subsidizing consumption in one of the wealthiest. Obviously this does not hurt the Americans. They save money by buying the cheaper, Chinese-government subsidized goods and have that much more money left over to spend on other services and goods which are not sourced from China.