Daily Video

January 19, 2011

Currency Dispute With China Continues

One of the top issues on the agenda when Chinese President Hu Jintao visits Washington, D.C. this week will be the value of China’s currency relative to the U.S. dollar. The U.S. maintains that China is purposely holding down the value of its currency, which makes more countries want to buy Chinese goods and puts the U.S. at a trade disadvantage.

If the U.S. dollar is allowed to fall against the Chinese currency, called the renminbi, then the U.S. will be able to sell more exports and import less. This would help more Americans find jobs in the manufacturing industry and would boost the American economy.

However, China would also like to keep its economy strong by maintaining a high level of exports, and the easiest way for them to do so is to keep their currency low. Right now, when China sells things to the U.S. market, it gets dollars in return. If it spent those dollars, there would be so much U.S. money in the marketplace that the value of the dollar would fall. Instead, China re-invests those dollars in the U.S. Treasury market, which is used, in turn, to buy more goods from China. In a way, say some economists, China is lending the U.S. money to buy stuff from them.

As China’s middle class grows and it sells more goods to the rest of the world, its exports are also getting more expensive. So, the U.S. and China are locked in a battle over currency value, inflation and trade that doesn’t seem to have many easy answers.

Quotes

“China has been very much concerned about the cost increase and the inflation, wage increase, property price increase, raw material price increase. And all those means that the Chinese companies, exporting companies and other companies, are losing competitiveness.” – Geng Xiao, Columbia University

“The Chinese export sector is a large employer, and they tend to be larger in terms of employment as compared with companies that don’t sell abroad. So, when Premier Wen Jiabao said that the currency appreciation is going to have a very substantial, negative effect on unemployment, I agree with him.” – Yasheng Huang, professor, MIT Sloan School of Management

“We need to open up more opportunities for American manufactured goods, farm and ranch products, and services, as well as allowing currency to appreciate more rapidly.” – U.S. Secretary of State Hillary Clinton

Warm Up Questions

1. What are exports and imports?

2. What is currency?

3. What does it mean when a currency “devalues?” Why does it matter?

Discussion Questions

1. What incentives does China have to bargain with the U.S. over currency value? How do the U.S. and China rely on each other when it comes to imports and exports?

2. Do you think the U.S. will get what it wants out of the current meeting between President Obama and China’s president? Why or why not?

3. Why do you think China re-invests its dollars in the U.S. Treasury instead of spending them around the world?

Additional Resources

Video Transcript

China and U.S. Debate Currency Values

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