Is the Chinese Currency Undervalued - Research Paper Example

Essentially, China enjoys preference as an import destination because its products are cheaper on account of the low value of the yuan. The US loses to China in terms of production and employment especially in industries such as textile, apparel and furniture (Carbaugh, 2012, p. 456). Moreover, concerns are also raised on the impact of the yuans low valuation in relation to the US dollar. In the event of trade where a Chinese exporter sells a product to an American trading partner, he receives the payment in dollar, which is then converted to the yuan.

This development leads to the appreciation of the Chinese currency because the demand for it increases. It also means that the supply of the US dollar increases, leading to its depreciation, triggering a series of effects that automatically induces the Chinese government to intervene. This paper will address the issue of whether Chinas currency is, indeed, undervalued. China maintains a fixed exchange rate policy relative to the US dollar as opposed to the convention in most of its trading partners, which follow flexible exchange rate policies.

The flexible system allows market forces to determine the value of the currency. China intervenes on its currency exchange on a daily basis. There were recent Chinese declarations that indicate willingness for a more flexible exchange rate policy. In 2010, for instance, US President Barack Obama lauded the Chinese government for its "decision to increase the flexibility of its exchange rate" and promptly stated that it "is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy" (Wei & Bull, 2010 ).

The indicated shift in Chinese currency policy is tantamount to an admission that a fixed currency is an unfair practice and that it allows the government to control currency in order to ensure its industries better competitiveness in the international market. The International Monetary Fund, used to through Article IV