How China’s Fiscal Policy Affects American Unemployment

by Fred Siegmund

Dollar Mouse Trap

The Obama administration continues to struggle with Chinese currency politics and policy.

Some in Congress are accusing China of currency manipulation, saying the Chinese undervalue their currency, which hurts jobs and companies in the United States.

The Chinese currency is known as the Yuan, although it is officially the Renminbi.

To Americans, the price of Chinese products means nothing until a Yuan price is converted to dollars and exchanged for Yuan.

When the Exchange Rate Increases, the Dollar Depreciates

A recent listing from the Wall Street Journal has the price of Yuan at $.1464 per Yuan. A higher U.S. exchange rate means the dollar depreciates against the Yuan for the same reason higher prices depreciate the dollar during inflation.

If the exchange rate of dollars for corn flakes rises from $2.79 per box to $3.79 per box, the value of the dollar depreciates against corn flakes because it buys less.

Every dollar price of Yuan converts to a Yuan price of a dollar. Divide the $.1464 into the Yuan to get 6.2827 Yuan for a U.S. dollar. If the U.S. exchange rate rises from $.1464 per Yuan to $.15, $.16 or more, the dollar depreciates, and the Yuan appreciates.

An appreciating Yuan will make U.S. products cheaper and encourage American exports and job creation here.

The big question, though, is this: what method do the Chinese use to undervalue the Yuan or keep the dollar price of the Yuan below the market price as people charge?

Exchange Rates, International Trading and Depreciation

From 1948 to 1971, the United States fixed foreign exchange rates with its trading partners by official policy. In that period, the fixed exchange rate overvalued the dollar, creating a large supply of dollars in Europe.

The United States Federal Reserve Bank had to remain ready to buy the dollars back from Europe to keep the dollar from depreciating because the Europeans wanted to sell their dollars for other currencies.

In the current period, the United States has not agreed to overvalue the dollar. Instead, it is the Chinese central bank policy to hold dollars rather than sell them and let the dollar depreciate.

Savvy Chinese know the Yuan is undervalued, and there is economic and political pressure to let the Yuan appreciate so American business have a better chance to export.

If they could exchange Yuan for dollars now at $.1464 and hold them in speculation, they would be able to profit when the dollar price of the Yuan rises by reselling the dollars at $.15, $.16 or more.

How Chinese Policies Prevent Dollar Speculation

For the Chinese to adopt a policy to undervalue their currency with the dollar, they have to prevent Chinese businesses, banks and individuals from speculating in dollars.

In other countries, especially in the 20th century, governments tried to prevent currency trading, but they found that trading occurred anyway in black markets.

In the old Soviet Union, authorities arrested people for what they politely called currency violations.

I have not read much about Chinese black markets. Maybe the Chinese have so much economic ownership and political control they are able to eliminate free markets and black markets.

Some of the problem, though, is American hang-ups. The American business community has decided it wants to have a policy of free trade, while the Chinese exploit these foibles to expand their exports with an undervalued Yuan at the expense of American jobs.

Still, the politicians blame the Chinese when what America needs is a little more sense, and a policy of managed trade.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

{ 1 comment… read it below or add one }

Conrad May 3, 2010 at 3:07 pm

I had an opportunity a number of years ago to transfer a large chunk of my invested money into China. I would have made a fortune. It was a moral decision on my part not to and it is one I don’t regret. I think it is important to make money ethically. The sweatshops and poor labour standards that build the Chinese economy and take away American jobs, in my opinion, are not an ethical way to invest money.

Thanks for the post.

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