China, the largest growing market in the world, currently has a policy regarding monetary regulation that allows the Yuan to “float”. This has seen the Yuan appreciate by approximately 24% over the past few years. Today, the exchange rate between the Chinese Yuan and the American Dollar is approximately 6.3 Yuan to 1 Dollar. Some argue that China should revalue the Yuan again the dollar, establishing a more fixed exchange rate. Others believe that current should allow the Yuan to float, as it constitutes the idea of a free market.
If the Yuan was revalued to be exchanged at a higher exchange rate again the, then the United State’s balance of payments would decrease proportionally. Alternatively, the balance of China’s payments would increase. Countries that have their currency tied with the United States, such as Mexico, would likely have their competitiveness improve while countries tied to China, such as Thailand, would have their competitiveness diminish. Wal-Mart, a major American corporation, would have harder time paying for their overseas imports. Likewise, American retail consumers would not be able to purchase as much due to higher prices relative to the Yuan. Chinese retail consumers, on the other hand, would be able to purchase more goods.
Initially, I believed that the Chinese Yuan should not be revalued upward. The idea of having a currency of greater worth seemed to be the default conclusion. After reading the assigned chapter, however, there seem to be many advantages of having a weaker dollar as well as a strong one.
Currently, the United States has a massive trade deficit due to having a stronger dollar in comparison to the currency in much of the developing world. In order to adjust this, America would need to have a weaker dollar to facilitate more exports. Having the Yuan revalued would be a step in this direction. This would allow people in the United States to export the goods they produce more easily due to them being relatively cheaper in comparison to their past price.
Having exports increase, however, would cause America’s imports to decrease. This would make it harder on international firms that have production occurring in China and other places around the world. A lot of Americans would believe this to be a good thing, as it would reduce job migration overseas. On the other hand, I see this as hurting the established American companies that rely on overseas production. If the United States did not have much production occurring overseas, then a weaker dollar would increase exports without as much of a detriment to the imports needed by corporations. With the increasing international trading of firms, revaluing currency would cause them to have to reevaluate their strategies and accommodate a more valuable Yuan. In the meantime, they would lose profits until their new strategies could be implemented.
Another argument against the Yuan being revalued that I learned through the assignment reading was that a massive change in exchange rate policies could cause “macroeconomic turbulence”. This could have unexpected results of economic decline due to the uncertainty the revaluation of the Yuan could have on the economy. While change itself is neither good nor bad, change that produces uncertainties would have the negative repercussion of having the confidence in the market decline. This could hurt investments and lead to another recession.
While initially I believed a stronger Dollar would improve American’s assets, after reading, I have come to understand that the issue is much more complex than that of the valuation of currency alone. I now believe that natural change is good and should be encouraged, but in small steps to reduce sudden impacts that could cause negative outcomes. Thus, I do not believe the Yuan should be revalued, and it should let it continue to float as dictated by the free market.