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China Pegged To US (Utsav 2 Sem 6)

China pegged its currency, the yuan, to the U.S. dollar from 1978 to maintain export competitiveness and encourage economic growth averaging 10% annually. This made Chinese exports cheaper and boosted China's economy, but also widened the U.S. trade deficit. In recent years, China has allowed the yuan to gradually appreciate against the dollar in response to trade partner pressure, adopting a managed float. Maintaining an undervalued yuan benefits China's export-driven economy but limits U.S. exports and manufacturing jobs.

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Harsh Shah
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41 views3 pages

China Pegged To US (Utsav 2 Sem 6)

China pegged its currency, the yuan, to the U.S. dollar from 1978 to maintain export competitiveness and encourage economic growth averaging 10% annually. This made Chinese exports cheaper and boosted China's economy, but also widened the U.S. trade deficit. In recent years, China has allowed the yuan to gradually appreciate against the dollar in response to trade partner pressure, adopting a managed float. Maintaining an undervalued yuan benefits China's export-driven economy but limits U.S. exports and manufacturing jobs.

Uploaded by

Harsh Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Harsh Shah

TY BME

China pegged it’s currency (Yuan) with USD

In the period of 1978 with the help of Deng Xioping, China was able to
commence it’s psosition as a global powerhouse. Till 2010 China grew at a faster
rate averaging GDP growth of 10%. This led China to become the second largest
economy. The majority of the growth is contributed by China’s exports.
US and China are one of the biggest trading partners. US in 2012 overtook
China in exports while China itself was the third largest importer of the US goods.
However, China’s majority of the goods were exported to US too which makes
China the second largest trading partner (Organization for Economic
Cooperation and Development in November, 2012). Thus, it can be concluded
that exports plays a major role for the exchange rate between China and US. The
massive growth of exports of China has been possible due to the pegging of Yuan
with USD. As China doesn’t follow floating exchange rate i.e., determined by the
market forces, it follows a currency pegging system. However, it is learnt that
due to the pressure of the major trading partners of China, Yuan had to
appreciate by approximately 2%. Thereby, China practiced a managed float
system against major currencies including USD.
In the modern era, especially for major Asian countries, a rise in per
capita income is availed due to the growth in exports. This fact has incentivized
China to avoid revaluation of Yuan as it would have a negative effect on the
exports. It also helps China to make imports expensive and also boosts over-
investment in China’s export manufacturing sector but at the cost of domestic
market.
Advantages:
 Undervalued Yuan has become a major export incentive for China.
 Thus, US can import the goods and services at cheaper rate which reduces
their cost of living.
 China owning huge dollar surpluses, invests in US Treasures and this
further helps the Government to fund the trade deficit (China was the
biggest holder of US treasuries in 2013).
Disadvantages:
Harsh Shah
TY BME
 The low value Yuan makes it expensive for the US to export to China.
 This further limits their exports growth and widen the deficit.
 Undervalued Yuan has led to the huge number of permanent transfers of
manufacturing jobs, out of the US.

Yuan revaluation?
Following would be the effects if Yuan was to be revalued though its
unlikely:
 China’s export growth would be limited.
 The trade deficit would reduce for US as the imports of cheap goods and
services would be limited.
 But at the same time, US would have to find substitutes for import of
manufactured goods like computers, toys, footwear, communications
equipment, etc.
 US would find countries with lower costs to replace China for
manufacturing jobs.

TIME 1 USD to 1 TIME 1 USD to 1 TIME 1 USD to 1


Yuan Yuan Yuan
1957 2.461809 1978 1.683589 1999 8.27825
1958 2.461809 1979 1.554939 2000 8.278504
1959 2.461809 1980 1.498386 2001 8.277068
1960 2.461809 1981 1.704542 2002 8.276958
1961 2.461809 1982 1.892542 2003 8.277037
1962 2.461809 1983 1.975675 2004 8.276801
1963 2.461809 1984 2.320042 2005 8.194317
1964 2.461809 1985 2.936658 2006 7.973438
1965 2.461809 1986 3.452792 2007 7.607532
1966 2.461809 1987 3.7221 2008 6.948655
1967 2.461809 1988 3.7221 2009 6.831416
1968 2.461809 1989 3.765108 2010 6.770269
1969 2.461809 1990 4.783208 2011 6.461461
1970 2.461809 1991 5.323392 2012 6.312333
1971 2.461809 1992 5.514592 2013 6.195758
Harsh Shah
TY BME
1972 2.245066 1993 5.761958 2014 6.143434
1973 1.989416 1994 8.618743 2015 6.227489
1974 1.961107 1995 8.351417 2016 6.644478
1975 1.859823 1996 8.314175 2017 6.758755
1976 1.941415 1997 8.289817
1977 1.857823 1998 8.278958
50 Years chart showing the exchange rate between 1 USD and 1 Yuan

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