China and America Battle Over Currency Strength

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Low Chinese exchange rates threaten American stability in the markets.

Fears of deteriorating American-Chinese relations have worsened as currency exchange rates was added to the increasing list of diplomatic issues between the two nations. President Obama made critical comments on China’s refusal to increase the value of its currency: the renminbi or yuan.

Mr Obama stopped short of directly claiming that the Chinese government actively manipulated their currency, but pointed out the significant disadvantage that American exports faced compared to Chinese goods that were “artificially deflated in price”.

Economists generally agree that the Chinese renminbi is undervalued compared to the American dollar and other currencies by between 25 and 40 per cent. A spokesman for the Chinese Foreign Ministry, Mr Ma Zhaoxu told The New York Times: “Judging from the international balance of payments and the currency market’s supply and demand, the value of the renminbi is getting to a reasonable and balanced level.”

Given that a cheap currency is fundamental to pushing China’s export rates, it is understandable that the Chinese government is reluctant to revalue the renminbi. Quite regularly Chinese officials have been lecturing their American counterparts on the necessity of keeping the value of the dollar stable, amid fears of the ever-increasing printing of dollars and bonds devaluing the American currency further.

Quite apart from the economic concerns, the Chinese government is unwilling to be seen as being pressured by America to undertake any action. Recently they have clashed with President Obama over climate change debate, whilst not openly attacking his initiatives, they have certainly resisted them; influencing other nations and causing a minor diplomatic stir in Copenhagen recently.

Taiwan remains a running sore on the body of American-Chinese relations as well. The Obama administration has forged ahead with arms sales to the island nation that is perceived by China as a breakaway province needing to be returned to the fold.

In addition the internet has become a major sticking point with recent allegations of Chinese hacking of American internet companies and the possible withdrawal of Google from China due to high levels of internet censorship.