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Should the White House pressure China to reevaluate its currency policy?

During Chinese President Hu Jintao's visit to the U.S. next week, one key issue he is slated to discuss with President Obama is China's currency, which many economists and world leaders say is undervalued.

By Ryan Kellett  |  January 11, 2011; 4:12 PM ET  | Category:  National Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati  
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Can someone please explain to me how you determine if a currency is undervalued? What is the basis for saying "oh, the yuan should be trading 4:1 to the dollar." When it was 8.24 to 1, people said it was undervalued by 40%. It's now around 6.62 to 1, but people are still saying it's undervalued by 40%. Is there some kind for formula for determining this?

Posted by: nuzuw | January 12, 2011 10:52 AM

While it could take a PhD courseload in economics to explain this. There are several formulas which use GDP and the printed money in circulation of both economies. As government prints more money, the value behind it becomes less and less. In the early 1900s the US government was on the "gold standard" and had gold reserves in Fort Knox to stand behind every dollar that was printed. That has not been the case since the 1930s.

To answer your questions about both ratios being "40% undervalued" is general difference in opinion among economists. That being said, different economists have different estimates of China's GDP and other measures to come up with their percentages. In inflation were to occur in the US (since US dollars would be worth less than they are now), you could make the case that the ratio would be less but with inflation about at zero now, probably the larger 8.24 is more accurate.

There are certianly other factors--government debts, bonds, unemployment, etc. but that as I said you could write a dissertation on.

Posted by: Larsen770 | January 12, 2011 11:49 AM

Ah, China's Policy and ours are fraternal twins! Anybody notice that? Obama Inc. has revalued our dollar to suit our collapsing Bushero economy. Did he/we consult with the Boss first? I mean, of course, China who holds tons of our paper-weighted dollars? Like Britan of old and new, its past time for any more pretense and pomposity. We are a "second world" economy

Posted by: dave_sheehan641 | January 12, 2011 12:13 PM

Certainly it is a bad joke to use the words "free trade" when the Chinese currency is not free to adjust to its real value. There is a reason why anti trust laws make predatory pricing illegal. The kind of trade deficit that the United States has grown used to over the last decade is not sustainable. The pattern of Chinese takeover of various American business segments through artificially low prices and more credit for American consumers than we can afford is a big negative for the future of our economy. We need an understanding with the Chinese government that we have to work together to manage our trade relations to get on a trend toward balanced trade. Higher dollar prices for Chinese goods are surely part of that process.

Posted by: dnjake | January 12, 2011 1:26 PM

The real question is less about currency than it is about trade barriors, technology theft, and subsidies for Chinese businesses.

Posted by: enclaved213 | January 13, 2011 8:10 AM

Enclaved echoes a theme expressed by the likes of Derek Scissors. What they miss is that an undervalued currency is the biggest of all Chinese subsidies, targeted on its exports. The proceeds from that price-rigging end up as hard currency reserves, which now exceed three trillion dollars if you count all the funds squirreled away in various accounts under the control of the Communist Party. At the same time, undervaluation throws up a massive barrier to imports from the US. Correcting the currency imbalance is the first step toward an improved relationship with China, and it's long overdue.

Posted by: chblum45 | January 13, 2011 2:22 PM

The Currency issue can only improve the trade balance but it would not help to solve the job issue in USA. It is the policies in USA drive the job overseas to other countries like India, China, Brizal.

America is like a sick person, but American people are hoping to cure this sick person by asking China to take the medicine. As a result, it will hurt the Chinese people.

Lawmakers should review the current policies to contain more jobs in USA. It is not China who takes American's jobs away, it is America's policy drives them away.

Posted by: ChaodongHe | January 17, 2011 2:22 PM

Can anyone really explain what undervalued currency mean?? It is just liberal political hacks like Krugman, Bergsten, wanting put pressure on China to raise their currency exchange rate, to zero out China huge forex reserve to weaken its political clout , and claimed 5000000 US jobs can be saved to put some dent on unemployment figure. Chinese are morons anyways to accumulate so mcuh dollars, as US national debts keep getting higher, and large paper printing exercise makes dollars eventually worthless. The real value of Yuan within the US, is how much more of your hard earned/saved dollars are you willing to shell out for worthless China junks, if Yuan rises significantly? And to Chinese, how much Yuan really worth would be how much they would be willing to forgo falling US dolllars to buy gold or any mineral resources or oil or critical new technology instead? soon or later, equilibrium price among all variables would be reached, and the world would begin a whole new ball game. Poor will remain poor always in this world, and rich will only get richer always!

Posted by: dodobird1 | January 18, 2011 8:40 PM

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