Education Principles of Economics China's Essay

Excerpt from Essay :

Most economists feel that if China's currency were allowed to trade freely, it would be a whole lot more. No one can know for sure how much more, but leading economists put it in a range of 10 to 40% higher value than it is now (Davidson 2006),

By keeping the Yuan artificially low in value, China is effectively giving the U.S. consumer a discount on all Chinese exports. By doing this they are discounting their own exports. This is good for many U.S. consumers because it allows them to buy cheaper clothes and electronics along with many other items. But on the other had it is bad for U.S. manufacturers who can't compete with low Chinese prices in the end. Some U.S. manufacturers have adapted by buying many component parts at a lower cost from China. The ability of a manufacturer to adapt depends on the company and the product and even on the level of globalization within an industry (Davidson 2006).

China's central bank is constantly buying U.S. Treasury bonds. This is done for technical reasons: in order to keep its currency fixed against the U.S. dollar, China must be able to redeem one U.S. dollar for 8 Yuan. As China's economy grows, it must be able to buy more and more U.S. currency in order to meet the growing number of Yuan. Due to the fact that China keeps buying U.S. Treasury bonds, the Treasury Department is able to keep long-term interest rates lower than they would be if they weren't. If China didn't buy so much, the U.S. Treasury would have to raise rates in order to attract other investors. Since Treasury bonds are the standard for most long-term debt, the lower rates are extended to credit cards and mortgages. These low mortgage rates fueled a dramatic housing boom, which raised the price of many homes. All those inflated home prices injected countless billions of dollars into the U.S. economy which left many Americans with home equity and cheap debt (Davidson 2006).

It is thought that a revaluation could cause an economic slowdown, even a recession in the United States. If China were to revalues its currency abruptly, it wouldn't have to buy so many Treasury bonds. This would result in mortgage and credit-card interest rates jumping upwards. This would prompt U.S. consumers to stop spending. Stores and banks would lose money. U.S. And Chinese factories wouldn't be able to sell any products. And this would mean they would shut down or lay off workers. This revaluation could bring a self-reinforcing downward economic spiral (Davidson 2006).

Chapter 6 - Conclusion

Most economists and policy makers in the United States and in China agree that, eventually, China will have to revalue its currency or the U.S.'s deficit with China will grow too large. There is quite a difference of opinion over how quickly China should revalue and what other measures need to happen to prevent painful economic costs. It is certainly theoretically possible to make the right adjustments in the right way so that both countries will keep growing, but it is also possible to do it all the wrong way (Amadeo 2009).

China is the largest bank that is in use by the U.S. This fact gives it tremendous leverage. In 2007 China allowed the Yuan's value to rise by 20%. In 2008, China pledged 4 trillion Yuan or about $580 billion, to stimulate its economy in order to avoid a recession. The funds, which represented 20% of China's annual GDP, were spent over the next two years. They also increased tax deductions for machinery, which saved businesses 120 billion Yuan (Amadeo 2009).

The economy in China appears to have a great influence on the global economy. They use the Yuan to control their prices which allows them to export goods at significantly lower prices than anyone else can. This in the end encourages investors to invest in order to keep prices and costs down, which helps them to realize a bigger and better profit. This in turn helps to increase competition across all markets which help to stimulate the global economy as a whole.

Chins seems to have a great deal of economic power across the globe. It is very important that the United States continues to work closely with China through the current economic downturn so that recovery comes quickly. It is important that everyone involved continues on a path that is best for everyone involved. This is will help to ensure that all industrialized countries recover from the current economic situation and once again begin to flourish and prosper. The economic power that China has around the world is one that needs to be harnessed and used to the good of everyone. This would not only benefit the people of China but all people around the world who have dealings with China in an economic way.


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