Allowing The Yuan to Rise Increases Chinese Buying Power

chinese investment moneyIn mid-March 2014 China announced a modest easing of exchange rate controls, aimed at making its slowing economy more efficient. Although the move was widely expected, after Premier Li Keqiang promised to give market forces a “decisive role” in allocating credit and other resources in the current state-dominated economy, it has been heavily criticized by Washington and other trading partners.

International critics are complaining that by Beijing’s suppressing of the value of the yuan, unfairly makes Chinese exports cheaper abroad and in turn, hurts foreign competitors. Moreover, China’s reform advocates say that by suppressing the yuan’s value, Beijing has been forcing even the poorest households in China to subsidize exporters. On the other hand, allowing the yuan to rise in value would increase the buying power of Chinese households, helping to achieve the ruling party’s goal of nurturing more sustainable economic growth based on domestic consumption instead of trade and investment.

Looking back to 2005, Beijing allowed the yuan to gain approximately 20 percent against the U.S. dollar, until the 2008 global crisis struck and the government took action to protect struggling exporters. At the moment, the yuan has been trading at about six to the American dollar. Analysts say Beijing might allow that stagger to 5.88 on the dollar by mid-2014, an temperate rise of approximately 2 percent. That would be small by global currency market standards, but unusually high by China’s standards.

The ruling Chinese Communist Party says it intends to inject more competition into the economy and nurture self-sustaining growth that is based on domestic consumption, instead of trade and investment. According the central bank, widening the trading band will help to “optimize the efficiency of capital allocation and market allocation of resources to accelerate economic development.”

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