US SINO MONEY WAR

We are very well aware that US is the Major importer of Chinese goods.

Now the US is suffering from high level of unemployment rate i.e. stuck near 10% with the U.S. economy having shed 8.4 million jobs since December 2007 due to double digit recession (source :www.reuters.com). It wants to minimize it by providing the employment. For that it wants to give jobs to people. This can be done if it improves manufacturing sectors. There has to be demand for their goods in the country too. For that it has to reduce its import from China. US is asking China to revalue Yuan so as to it increases its price of their goods. As the prices increase, the demand for their goods in US and other countries will decrease and hence US can increase its manufacturing sector to provide employment and also to increase exports in order to improve their of Balance of payments (right it is expected that US deficit is 140% of its GDP).

China has always been blamed by the economist (including IMF on March 1 ,2010) for keeping their Yuan undervalued intentionally by to 40 percent because of this  China gives an unfair price advantage in international trade, takes jobs away from other countries and adds to global financial distortions.

Definitely China being notorious for Protectionist nation won’t let this happen. What will happen if China appreciates it Yuan? The demand for Chinese products will reduce as the price of the goods increases. Thus this will impact its exports, reducing the demand and increasing their unemployment rate. Will China do that? Never!!! But Chinese Vice Commerce Minister Zhong Shan bluntly said that it’s nobody interest to revalue Yuan anyways.

Moreover there is another school of thoughts by some economist that evaluation of the Yuan would not bring back U.S. jobs because many of the labor-intensive products Americans buy from China have not been made in the United States for decades(source: Reuters).

Some are weary that this could also be spark for US Sino Trade War affecting the International Trade on whole. China which holds $889 billion of U.S. government bonds and whose help is needed to tame the nuclear ambitions of Iran so US has can’t do much than requesting. But US is making policies such as anti dumping policy , strict tariff plans etc to indirectly curb China’s exports.

China on other side is asking to devalue US dollars for which US says that this will affect the entire Global Financial systems. China also says that US can increase it exports to China which has been stagnating for a long time. 

Also China is under stress mainly because China is thinking this can lead to isolation in G20 meetings and moreover domestic factors and actors convinced China's leadership that diminishing marginal returns for keeping the Yuan fixed and massively undervalued had kicked in.

In the end what I think is right now the Ball is China’s court.

 

Cheers

RMN

Remin