Saturday, December 15, 2007

Yuan versus Dollar

Ever wonder about what they are talking about when there is a discussion on monetary policy regarding the Chinese yuan compared to the American dollar and its effect on the trade imbalance? Well without getting into it too deeply, Charles Wolf, Jr. of The Wall Street Journal writes:

"In 2005 the yuan was worth 12 U.S. cents. It is currently worth 13.5 cents (7.4 yuan per dollar). Many believe that if the yuan's exchange value were to increase further, perhaps to 17 cents or 18 cents, the bilateral imbalance between the two countries would be substantially reduced, if not eliminated...This reasoning, though plausible, is wrong. [the reasons why are involved] China's exports to the U.S. would thereby become more expensive in U.S. dollars and would therefore decrease, while China's imports from the U.S. would become less expensive in Chinese yuan and therefore would increase."

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