China brazenly devalues its currency again
The Alliance for American Manufacturing (AAM) has repeatedly pointed out that China's deliberately undervalued currency (the Yuan) is a tremendous problem for U.S. manufacturers. An undervalued Yuan allows Chinese manufacturers to sell products in the U.S. at artificially low prices.
Not only has this been a longstanding problem, but CNBC reports that Beijing has now moved the value of the Yuan lower by a further 1%:
The yuan’s recent decline, the first in seven years, is raising eyebrows among U.S. politicians and sparking concerns that the weakening currency could trigger another round of nasty bickering between Beijing and Washington.
The renminbi has fallen one percent against the U.S. dollar so far this year, after appreciating 22 percent since 2005 when China abandoned the currency’s peg to the greenback. Analysts say the development could further the case for U.S. lawmakers, who have long held the belief that China is keeping its currency artificially cheap, giving the country’s own exports an unfair advantage.
Why does this currency peg matter so much?
- The U.S. racked up a $295 billion trade deficit with China in 2011.
- The latest monthly U.S. trade figures show the U.S. clocking a $27.4 billion goods deficit with China in June, the fourth straight monthly increase.
According to the Wall Street Journal, 28 of 41 economists surveyed believe that China's currency, the yuan, is undervalued. Estimates for this undervaluation vary, but apparently 23 of those economists estimate that it is undervalued by more than 5%, which provides a major advantage for China's exporters:
Allen Sinai of Decision Economics estimates the currency is undervalued by up to 30%. And Julia Coronado of BNP Paribas say that if the exchange rate is balanced, China’s currency policy makes no sense. “If it weren’t [undervalued by more than 5%] then what would be the harm in letting it float?,” she said.
Thankfully, most of the U.S. Congress would agree. Last fall, the Senate passed a bill to penalize countries that unfairly manipulate their currency. And currently, a majority of the House has co-sponsored a similar bill, H.R.639, "The Currency Reform for Fair Trade Act," including 64 House Republican cosponsors.
Unfortunately, House Speaker John Boehner has refused to let H.R.639 to come to the floor for a vote.
Boehner's obstruction on the bill is extremely perplexing, and one has to wonder if the Speaker and others in the GOP leadership are aware of Presidential candidate Mitt Romney's bold campaign pledge to designate China as a currency manipulator on day one of his presidency?
Romney's stern challenge to China is welcoming news to U.S. manufacturers, though. And it's also wisely timed, since President Obama and Treasury Secretary Tim Geithner have avoided citing China as a currency manipulator, despite an Obama campaign promise to do so.
BOTTOM LINE: China's undervalued currency could very likely become a major issue in the fall presidential election.
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