Slate's Moneybox: U.S., China Clash on Currency

Slate columnist Daniel Gross explains how China keeps its currency value artificially low. Earlier this week, the U.S. Treasury Department accused China of manipulating world trade by pegging its currency, the yuan, to the value of the U.S. dollar — in effect, lowering the value of its own currency and attracting overseas investors.

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From NPR West and Slate magazine online, this is DAY TO DAY. I'm Alex Chadwick.

Coming up, can Americans compete with China? A question for the Bush administration.

First, a little background. Trade with China is in the news this week because the US is demanding China cut back somehow on a huge increase in clothing that China is selling in this country, one aspect--and a very public one--of the trade imbalance we have with China. It's gotten much worse since the beginning of this year when previous barriers to cheap Chinese imports were dropped. There are many elements of this problem. Working with our partners at Slate, DAY TO DAY's crack editorial staff has reduced the complications to the essentials, which we're going to deliver to you in the next two minutes. So listen. Here it is.

The most fundamental problem may be currency: our dollar and the Chinese yuan. The most important world currencies, like the dollar and the euro, float up and down against one another with their relative value determined by the market. But China sets the value of the yuan. And by keeping its currency artificially cheap against the dollar, China can sell its exports for lower prices in the US and expand this enormous US trade deficit with China.

Earlier this week the Treasury Department reported to Congress that China's current policy distorts world trade. But it did not accuse China of manipulating its currency, and for some in Congress, that report did not go far enough. Here's New York Senator Charles Schumer. He's a Democrat.

Senator CHARLES SCHUMER (Democrat, New York): If it quacks like a duck and walks like a duck and swims like a duck, it's a duck. They are manipulating their currency. And for the report not to find that is sort of strange.

CHADWICK: Peking duck maybe. Anyway, here to explain how the Chinese keep their currency artificially cheap is Slate's Daniel Gross. We asked him for an explainer on the question: Do the Chinese manipulate their currency? The answer, he said, is yes.

DANIEL GROSS reporting:

The Chinese renminbi, which means `the people's currency,' comes in units known as yuan. Since 1994, China has effectively linked the yuan to the dollar. It does so by continuing offering to swap dollars into yuan at about 8.3 yuan per dollar. Chinese companies and individuals are constantly accumulating lots of dollars, which they get from selling lots of clothes, toys and electronics to Americans. But the locals have to turn all those dollars into yuan in order to pay employees or to buy goods and services. In a market system, this dynamic of supply and demand would drive the yuan higher against the dollar. But China's government doesn't want to let the yuan strengthen since that would erode China's cost advantage vis-a-vis the US.

So China's central bank, the Bank of China, is the buyer of first and last resort of dollars. It's constantly in the market, every day, offering to buy dollars and sell yuan at a more or less fixed price, regardless of demand. Whether it buys dollars or sells the yuan directly to Chinese companies or does so through intermediaries, like local banks, the Bank of China determines the market price.

By keeping the yuan tightly aligned with the dollar, China perpetuates the cost advantage it has over the United States as a manufacturing center. When the dollar weakens against the euro and the yen, the yuan weakens by roughly the same proportion. As a result, Chinese-produced goods remain cheap in this country. And perhaps more significantly, even if a sinking dollar makes US-produced dishwashers cheaper in Europe or Japan, it makes Chinese-produced dishwashers cheaper still.

CHADWICK: That explainer from Daniel Gross. He writes the Moneybox column for Slate.

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