An Epic Battle Is Brewing Over The Yuan

| October 5, 2011

For some time now, China’s been working to turn their currency, the Yuan, into a global reserve currency.  Their reasoning is fairly straightforward… they’d like to stop using the US Dollar for global transactions.

China’s already taking steps to achieve their lofty goal.  The most important step they’ve taken is “un-pegging” the Yuan from the US Dollar.  That simply means they’re allowing the Yuan to trade freely (sort of).

While the Yuan has appreciated by over 5.2% in the past year, for US Senators that’s not enough!

Here’s the scoop…

Right now, lawmakers are struggling to fix the problems of high unemploy-ment and a massive trade deficit with China.  They’re looking at every angle to get the job done.  And China’s currency is an easy target.

We know China has manipulated their currency in the past and the central government is still controlling its rate of appreciation today.  They don’t even hide it.  Every day, the Chinese set a “rate fix” and the currency can’t deviate too much from that set rate.

The Chinese are trying to get to a 100% free trading currency.  But China’s central bank says the appreciation needs to proceed in an “active, gradual, and controllable manner.”

But the US Senate is getting impatient…

A bill made its way to the Senate floor… one seeking to impose trade tariffs on Chinese exports, as a way to level the playing field.  The US Senate clearly feels the Chinese are unfairly manipulating their currency.

It’s estimated by some, China’s currency policies have cost the US more than 2.8 million jobs since 2001.  Clearly, the Yuan’s undervaluation gives Chinese companies an unfair advantage against US manufacturers.

As you can imagine, the Senate bill has the Chinese all fired up.  Their Foreign Ministry expresses “regret” that the US Senate would even consider such a move.

The Chinese responded by saying the Yuan is appreciating properly at a “near balanced level”.  And if the Senate bill were to pass, China’s central bank says it “may lead to a trade war we don’t want to see.”

War With China!

Before I go any farther, let me make it perfectly clear that I completely agree with the US Senate.  At least, I agree with their intentions.

Yes, it’s true the Chinese have an unfair trade advantage due to an undervalued Yuan.  They gain a clear advantage in international trade by having cheaper goods than the US.

And yes, they’re not playing by the rules and need to be held account-able.  It’s been decades of Chinese price control, which have led to such a massive trade imbalance with the US.  There’s no doubt about it…

But now’s not the time to pick a fight.

You see, as much as it sounds like a homerun to pass this bill and bring more jobs back to the US… you’re forgetting the US is about to pick a fight with a bully.

The problem is, if the US passes this bill, there’s no doubt we’ll see the Chinese retaliate.  And when they do, it will only hurt US businesses more.  The Chinese could pass tariffs twice as large as the US is considering.  They could even further slow the Yuan’s appreciation.

The US Senate needs to think this through…

Right now, with US businesses on their heels and teetering on the brink of recession… it’s not the time to start a trade war!

The US can’t manipulate its currency the way the Chinese do… and politicians will back down if the economy takes a hit from a trade war.

The last thing the US can afford is get into a trade war with the number two economy in the world.  It’s just not the place or time to go about resolving the problem.

If somehow the bill does pass, expect to see the Yuan’s appreciation rate slow.  If you’re trading the Yuan, stay on your toes for news from Capitol Hill…

I’d like to think the US Senate is just brandishing a weapon.  It’s my thought they really don’t want to pass the bill… they just want to push the Chinese into releasing control of their currency sooner than they‘re ready to.

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Category: Currency Trading

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