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The Chinese Yuan Dilemma

by @ 9:35 pm
Filed under: financial

China FlagThe senator from New York, Chuck Schumer, is right. The Chinese government has pegged its currency, Yuan, artificially low against the US Dollar and that gives the country an unfair trading advantage. Branding China as a currency manipulator, isn't far from the truth at all.

The cheap Yuan gives China the power of pricing where the cost of labor and material is so low that other trading countries such as those in north America or Europe can't compete.

The point is that China should float its currency and let market forces dictate the price. Of course such a move by the paranoid and controlling Chinese is unlikely. Can you even imagine the Chinese trusting their currency to the whims of the world markets and currency traders?

But even if the Chinese wanted to float their currency, it won't be easy, as evident today. Even the hint of effecting a tiny appreciation in the Yuan sent the currency market into a frenzy today. The nervous traders couldn't quite figure out which currency would benefit the most and currencies saw big fluctuations as a result. I can only fathom the turbulence that would grip the markets if China were ever to outright suggest floating the Yuan.

That the Chinese should unshackle the Yuan is a given, if not by choice, then through high tariffs put on their exports. The big question is how would they go about doing that without triggering a meltdown in the financial markets?

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