Tuesday, April 17, 2012

Why do U.S. politicians want to see the yuan appreciate and what does that mean?

Many U.S. politicians have accused China of keeping its exchange rate artificially low. These politicians are primarily concerned about U.S. jobs.  All else equal, if goods made in China became more expensive (due to currency appreciation) people in the U.S. would buy more domestically produced goods and fewer Chinese goods.  Factories in the U.S. then might hire more U.S. workers.

So that you can impress interviewers, make sure you use the right vocabulary when discussing Chinese currency. The official name of the Chinese currency is the Renminbi (RMB) and a unit of this currency is the yuan. Yuan should be pronounced something like U.N. (for an audio clip go here NPR audio clip). To further complicate matters, the symbol for the RMB is ¥ and it is quoted on currency exchanges as CNY, short for Chinese Yuan. 

This 3 minute news clip was made 6 months ago, when the U.S. Senate was considering a bill to punish China for an undervalued currency. Despite sympathy from President Obama, the bill did not make its way through the House and did not become law.  China warned that passage of the bill could cause a trade war. http://youtu.be/WQQtreKkljg

In the intervening months, China has let its currency appreciate. China just recently announced that it would let its exchange rate fluctuate in a wider band, which potentially could lead to more appreciation.  See this WSJ article for details.
WSJ (4-16-2012) China Loosens Grip on Yuan by LINGLING WEI

In this recent 3 minute clip from the English language news channel of China Central Television (CCTV News), two Chinese economists argue that the main problem for U.S. workers is not an undervalued Chinese currency, but rather factory automation.

This screenshot was taken at http://www.chinaknowledge.com/Travel/Currency.aspx on 4/16/2012. This table shows how many CNY (ChineseYuan) it would take to buy a unit of various foreign currencies (Other/CNY).  To learn how to read this table consider the USD/CNY exchange rate listed as 6.3199. This means $1 U.S. dollar costs 6.3199 Chinese yuan. Equivalently, the CNY/USD exchange rate = 1/6.3199 = .15823. This means that 1 Chinese yuan costs almost 16 cents in U.S. currency.

Self-quiz for students:
For extra motivation, questions like these will appear on your final exam.  Assume  1 yuan = .15823 USD or  equivalently, 1 USD =   6.3199 yuan.
1. What is the price in dollars of a coffee pot that costs 100 yuan?
2. What is the price in yuan of a coffee pot that costs $20?
3. What would be the new CNY/USD exchange rate if the RMB appreciates by 10%?
4. What would be the corresponding USD/CNY exchange rate?
5. After the RMB appreciates, what would be the new price in dollars of a coffee pot that costs 100 yuan?
6. After the RMB appreciates, what would be the new price in yuan of a coffee pot that costs $20?

          Post  Questions:
1. How might appreciation of the RMB affect employment for coffee makers in the U.S.?
2. How might appreciation of the RMB affect the trade balance, GDP, and unemployment rate of the U.S. (all else equal)?
3. Whose views on the CNY/USD exchange rate do you think are more valid, the U.S politicians or the Chinese economists?

Self-quiz key:
1. $15.82
2. 126.40 yuan
3. .174053
4.  5.7454
5. $17.41
6. 114.91 yuan 


  1. I found your article very helpful.

  2. Hello, I have a question about the appreciation of Chinese yuan.
    I read from a macroeconomic textbook which said that "When a central bank in any country increases the money supply and causes the price level to rise, it also causes that country’s currency to depreciate relative to other currencies in the world." I believe this is what happening in China, but how come the Yuan is still appreciating to the dollar(in 1980s' it's about 8 yuan : 1 dollar and nowadays is 6.2 yuan : 1 dollar), I cannot figure out the reasoning here.
    Thanks for help!