Chinese Yaun: The Powder Keg Currency - Answers

China has been and still is the fastest growing economy in the world and it doesn't seem to be stopping any time soon. Quoted from Wikipedia, in 2006, the GDP "$2.68 trillion USD. Its per capita GDP in 2005 was approximately US $1709 (US $7204 with PPP), still low by world standards, but rising rapidly. Thanks to exported goods, it has enjoyed a tremendous growth without pause. To compare the enormity of the trades, it has just surpassed Canada as US’s biggest importer of good. Find a graph related to this article right on

China’s exports are expanding and at a menacing rate, especially to high consumption societies such as the United States and European Union. While largely exporting, it has little imports other than oil. Virtually all of the imports in these countries come from China, particularly in textiles and toys. With these export revenues, how does the Yuan value in the market?

For more than a decade, the dollar was pegged at a rate of 8.28 Chinese Yuan for every dollar. While this policy to play an economic advantage, especially keeping low so the exports sold are cheaper than other exporting countries that compete with China, particularly its Asian neighbors. This policy has been the biggest factor in making China the biggest exporter of goods. But under the pressure of the US, it has raised the value of yuan by 2% to a basket of currencies. The basket is comprised of the U.S. dollar, euro, Japanese yen and South Korean won and small portions from the British pound, Thai baht and Russian ruble. Expert estimates that the value of the yuan increase 5% each year compared to US dollars on a quantitative valuation. In total, it is at least 40% lower than its current value. This estimates come calculating the GDP, import/export ratio, public deficits, interest rate, and the future outlook of the economy. It's still not a freely floating currency.

If the yuan is to freely float in the market, the US dollar, and not to mentioned many European countries, would devalue tremendously along with inflation in many countries with large imports from China. This is due to the fact that all the goods will now be 40% (an estimated value taken from above) more expensive on all Chinese imported products. In addition, these countries will see lower purchasing power needed to import necessary goods such as oil. For now, the fixed currency rate is posing a problem to many countries who come to depend on these low cost imports to provide continued consumption that drives domestic economies.

Although, there is a more relaxing policy from China to increase its value steadily, there is no sign that it’s ready to float it freely yet. The government doesn’t believe it’s structurally can handle the abrupt change, such as joblessness. Whether the yuan will float freely will require major adjustments from many governments to prepare for the shock. It will certainly be interesting to watch a country such as China sneezes and see how many others catch a cold. The US would no longer be an economic powerhouse that affect the world economy. More details:

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