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5.18.2007

IMPLICATIONS OF THE YUAN'S OVERVALUATION


American lawmakers are raising serious questions regarding China's alleged currency control measures. According to a CNN.com article, some US legislators and economists believe that the Yuan is overvalued by as much as 40%, making Chinese products unusually competitive in the export market.

A deliberate move to restrict the appreciation of a currency's value is currently viewed as a form of export subsidy and some believe that it has greatly contributed to the huge volume of Chinese exports to the US. At this point, there exists a huge trade deficit between China and the US, with the latter on the losing end by as much as US$233 (2006).

This column believes in minimal government action as the best way of running an economy. The Chinese government can best support its citizens by minimizing its intervention in the currency trade. If the currency's value is allowed to fall freely, uncompetitive companies will lose in the export market and die a natural death.

Sad it may seem, it actually eliminates the country's uncompetitive industries, therefore allowing the Chinese workers to transfer and acquire better skills, in areas where the country has competitive edge. In the long run, it will lead to a more competitive China.

Related article: Peso Gaining way too fast

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