China announced today that they will allow their currency (which is grossly undervalued) to fluctuate in value relative to the dollar. In the past, China has pegged its currency, the Yuan, to a fixed value relative to the dollar that under values the Yuan. The undervalued Yuan makes Chinese products artificially cheap - especially in the USA. In effect, this lets Chinese companies (many of which are still state owned) gain an artificial advantage in world trade. The Yuan is still far below what its value would be if determined on the world currency markets. This is the economic equivalent of Barry Bonds promising to cut his steroid use in half.
So why now? The US has been pressuring China to do this for years. Why are they doing it now? I suspect this is China's attempt at offering a quid pro quo regarding a number of acquisitions of US companies by Chinese state owned enterprises (including Unocal and until recently, Maytag). The Unocal acquisition in particular has provoked significant political resistance. If this is something the Chinese are willing to give as part of the price for Unocal, I say we insist they allow their currency to float freely. Frankly, letting the Chinese have Unocal would cost far less to our security than we would gain in economic terms from a market based Chinese Yuan.
Thursday, July 21, 2005
Posted by Raised By Republicans at 1:24 PM