Macroeconomic Analysis Essay Example

(Sexton, 216). These figures clearly demonstrate that the yuan is undervalued when compared to the dollar.

In order to pursue domestic objectives such as achieving full employment through monetary measures, China maintains limited convertibility and strict restrictions on its currency.

Analysts believe that devaluing the yuan against the dollar will have both positive and negative effects on the US economy. A lower valuation of the yuan would make imports from China cheaper for American consumers, leading to inflation but reduced prices overall. However, this would negatively impact the US industrial sector by reducing production capacity and employment opportunities as Chinese exports become more affordable. This is because an undervalued yuan decreases US exports to China, resulting in job losses for American workers.China is taking measures to slow the appreciation of the yuan and increase its convertibility, while also promoting the use of yuan as a settlement currency for Chinese trade. China encourages both domestic companies to invest overseas and foreign companies in China to issue bonds denominated in yuan. The value of the yuan has been steadily increasing as it is linked to various currencies, not just the US dollar. This has resulted in lower prices for services in China compared to the US due to their significantly lower GDP per capita. However, this situation could lead to long-term economic distortions. Global finance officials are pressuring China to allow for a faster appreciation of the yuan because critics argue that its weak currency contributes to inflation within China and imbalances in global trade. These imbalances have led to cheaper Chinese products abroad. One major reason why the US desires a stronger yuan is that it would boost

exports, making them more appealing and affordable in both China and other countries worldwide. In 2005, a bill was introduced by the US Senate with the intention of imposing sanctions on countries manipulating their currency, specifically targeting the manipulation of the yuan. Currently, China is ranked as the second largest supplier of imports for the United States, providing labor-intensive consumer goods including games, toys, shoes, textiles, apparel, and electronics.
China's undervalued currency has resulted in tough competition for some US industries from Chinese imports. China has become the largest holder of foreign exchange reserves globally through interventions in currency markets and restricting its currency against others, especially the dollar. In 2010, China had $3.2 trillion in foreign exchange reserves, a significant portion of which was invested in US public and private securities. This concentration of reserves held in dollars concerns US policymakers as it means a large part of the national debt is controlled by foreign entities like China's central bank. To reduce dependence on the dollar, central banks are investing in assets denominated in other currencies. However, China has taken a different approach with the establishment of a government-owned cooperative called the China Investment Co.Ltd., capitalized at nearly $300 billion and considered the world's largest government-owned cooperative (Chen, Jian & Yao). This cooperative aims to utilize China's extensive foreign exchange reserves to invest in higher yielding assets. It is crucial to carefully consider decisions regarding diversifying these reserves and the yuan as it could have negative implications for the US economy. Allowing the yuan to float against the dollar would inevitably lead to its appreciation, which could have both positive and negative effects on specific

sectors of the US economy.
While the trade deficit between the United States and China has not impacted employment in the US, caution is necessary regarding China's exchange rate reforms. Both Chinese and US officials recognize the necessity for economic reforms to promote increased growth and domestic consumption. There are concerns that current policies hinder adjustments in global trade imbalances, which could potentially jeopardize global economic growth.