Unit 3: Should Obama be thanking the Chinese???

Should President Obama consider writing a thank you note to Chinese leaders for artificially manipulating the Chinese Yuan in the foreign currency markets?


For many years now, Chinese authorities have artificially intervened in the foreign currency market by buying up U.S. dollars spent on Chinese products and, in turn, investing those same U.S. dollars in U.S. Treasury Securities (ie, bonds and notes). For those that are not familiar with the foreign currency market, Chinese authorities buy the same U.S. Dollars provided by the U.S. to purchase Chinese products and, thus, leave or supply Chinese Yuan to the currency traders resulting in a decrease in the price of the now more plentiful Yuan and an increase in the price of the now more scarce dollar. The Chinese authorities intervene in the foreign currency market for the sole purpose of depreciating (weakening) the Yuan relative to the U.S. Dollar, thereby helping Chinese exporters to become more price competitive in global markets. It is estimated by many economists, that the Yuan may be overvalued versus the U.S. dollar by approximately 30% due to this foreign currency intervention by China.

So while it is true that this action taken by Chinese authorities clearly depreciates the Yuan and appreciates the Dollar, thus, unfairly harming U.S. exporters; it is also hitting the “sweet spot” by sending those same U.S. dollars back to the U.S. Government to fund the record federal deficit spending expecting to total $1.3T in 2011 and providing American citizens with reduced prices on imports via the stronger dollar! More specifically, this currency intervention by Chinese authorities provides needed loanable funds back to the U.S. Government lowering borrowing costs or interest rates during this important U.S. economic recovery time. It also appears that US leaders are sending mixed messages to China as just last year, Secretary of State Hillary Clinton visited Beijing to encourage Chinese leaders to continue to purchase U.S. Government securities. This seems at odds with US officials cry for China to stop intervening in the foreign currency markets because by doing so needed federal deficit funding would dry up from the Chinese, forcing the US to borrow elsewhere and raise interest rates to entice that lending.

In summary, perhaps in the short term the United States should consider not pressuring China, as Treasury Secretary Tim Geihtner, Obama and the media have done regularly. Perhaps US officials should lay low, at least for awhile, and start pressuring the Chinese again in about three or four years, after the Government’s budget no longer calls for such large spending deficits.

Review Questions

What specifically are Chinese leaders doing to keep the Yuan weak against the U.S. dollar?

Why are Chinese leaders intervening in the foreign currency market?

Which parties, both American and Chinese, are helped and hurt by this intervention?

What would happen, other things equal to U.S. interest rates if Chinese authorities immediately stopped intervening in the currency market? Why?

What would be the immediate impact on the U.S. poor and working class if the Chinese immediately stopped intervening in the currency market?

What policy position would you take as President of the United States on this issue?