What exactly is China doing to keep the value of their currency low, and why is it important?

They make more of it… lots more of it. The result is inflation which leads their money to statistically be worth less. It’s important because it benefits companies that reside in China and operate off their money. Due to the conversion rate they get a benefit, which is minuscule on small things, but monumental when you’re talking business deals worth millions of dollars.

This is also why it actually BENEFITS the US in some cases for the value of the dollar to go down.

China has fixed the exchange rate of its currency. That means that no matter what the relative value of the two currencies are, they exchange rate will be the same. China has fixed the rate artificially low, which means you can get more yuan then you should be able to. This makes Chinese products cheaper, and allows them to wipe out the competition around the world.

We do get cheaper prices on Chinese goods, but that means our firms can’t compete. Essentially, China is subsidizing its products, which violates free trade agreements, except I don’t believe we have one with China.

In China, everyone has a lower income, because essentially, the Chinese are giving us the reduction in prices out of their own pockets. They do this to try to improve employment, amongst other things.

We can’t compete, so we lose jobs. On the other hand, China has a pent-up demand from a middle class that simply can’t get things—or as many things as they would like. All Chinese good are going overseas. They are too expensive in China, as a result.

The imbalance in trade means that the middle class really doesn’t have as much income as they would otherwise have. Therefore they can’t buy American goods. They are subsidizing Americans by taking lower salaries (except it isn’t their choice).

These are distortions in the market that lead to behavior that would not otherwise occur. It creates perverse incentives, which are generally bad. Eventually, the yuan must be set free, and it will be, but not before a lot of unfortunate things happen in the economy, such as a lengthened recession.

Simplistically:

Countries that rely on a service economy (selling services and advertising to each other, rather than actual physical things) like to keep the value of their currency high relative to other currencies to give themselves the greatest buying power.

Countries that rely on an industrial economy (manufacturing actual things and selling them to other countries) like to keep the value of their currency low so they can sell more things to the rest of the world.

I’m closer to understanding, but the extent of my economics education is a solid A in one macroeconomics class. So I forget some of the intricacies of exchange rates. Let me summarize what I’ve read so far and you can help clarify any gaps or flaws in my reasoning.

Here’s how I see it: China sells lots of exports. Therefore in a free market, demand for the yuan increases. As that demand increases, so should the value of the yuan (relative to the dollar). This should result in Chinese exports eventually decreasing as they become more expensive to other nations, and Chinese imports (and domestic purchases) should increase as the yuan gains buying power. Hopefully I have that correct. If not, please clarify.

What China is doing is printing more money? so more yuans are chasing the same goods and services. This creates inflation in China, and devalues the yuan against what would otherwise be it’s natural rise. By doing this, they do not allow exports to decrease and imports increase as should occur in a free market, maintaining balance. They are printing money to keep exports to the world high, as they are relatively cheaper to purchase than goods and services produced in other nations.

So people in China actually have more difficultly purchasing goods produced in their own nation, and China gains an unfair advantage in the world market. But essentially China is strengthening their economic position in the world at the expense of its own citizens.

Please correct flaws in my thinking. Also, how is China determining the rate at which to print money then? I’m guessing there must be a linear relationship between their domestic rate of inflation relative to the value of their exports for them to maintain this competitive advantage. In other words, they have to print money at a correct rate to maintain the lower value at the same amount.

@cockswain the British had the exact same problem with China back in the 19th Century.