There are many areas of tension between the U.S and China; from tires to steel to chicken feet. Recently there has been threats of a currency war with the U.S claiming that China manipulates its currency to gain an unfair trade advantage. The whole purpose of Chine keeping their currency low is so that their exports can become more competitive in the global market. Due to the low price in China’s goods, which resulted with a slowdown in economic recovery among many countries. This is mainly due to the low price of the Chinese good, which makes the demand increase.
The Chinese currency is a fixed rate that the government keeps it constant to currencies in other countries. This continued up until 2005, when the Chinese currency was said to be kept artificially low due to their monetary policy. Since the price of the Chinese RMB is much lower compared to the U.S dollars, it can flood out the dollars out of the market.
The diagram shows how there is a shift in supply in the Chinese Currency. The increase in supply is shifted from Q1 to Q2, and would decrease the price form P1 to P2.
The articles explain how China has agreed to manipulate its currency. However China still own millions of debts from the US, and this devalues their Chinese RMB, especially for the US. Yet China is not the only country that is manipulating their currency. So are many other countries, and this is what it’s leading to the currency war. Currency war is when number of countries either strengthen or weaken the currency, and is often functions like a chain reaction, since one country’s currency is relative to other country’s currencies.
Recently there were news telling how the Chinese government is on their attempt to devaluing their RMB currency. China has been motivated to devalue their own currency, due to the rising value of their RMB. As of consequence, we can see how China is facing currency devaluation.
