The currency manipulator: Is China significantly keeping its currency value down?

By Sven Gorn

In the debate for the 2012 U.S. presidential election the foreign trade with China was one of the heady topics. While Obama says that he will do everything to make sure that „China plays by the rules“, Romney claims that he will stop China from artificially keeping the value of the Yuan down. Romney says that he „will label China a currency manipulator on day one“ after his election, in order to enforce tariffs in markets where China takes away jobs from the U.S.. Is China significantly keeping its currency value down?

The Chinese Yuan is in a controlled peg relative to a basket of currencies. China controls its exchange rate by purchasing or selling foreign currencies including the U.S. Dollar. China can buy huge amounts of U.S. Dollar in order to keep the value of their own currency low compared to the U.S. Dollar. This policy enables China to produce and sell its products cheaper as exports.  (Finance Yahoo)

Big Mac Index (The Economist)

One measure that supports the argument that China’s currency is undervalued is the Big Mac index, an index published by the Economist magazine that shows that by July 2012 a Big Mac in China was selling at 2.45 USD. The same Big Mac was selling in the US for an average of 4.33 USD. This would imply that the Yuan is undervalued at about 43% based on the purchasing power parity.

In the last decades there were two significant movements of the Yuan. First: Between the 1980s and 2006 the Yuan devaluated from around 1 Yuan per USD in 1980 to above 8 Yuan per USD in 2006.  Second: Since 2006 the Yuan has appreciated in value at about 26 % and at about 11 % since Obama took office in 2009. Is the Yuan still undervalued?

In June 2012 David Lipton, first deputy managing director of the International Monetary Fund, said that the Yuan is only moderately undervalued.

“As China continues its reform to support consumer-based demand and rebalances its economy, the renminbi (Yuan) will strengthen as that process continues,” Lipton said in Mid-2012.

In Lipton’s opinion central bank’s interest rate cut in June will lead to lower costs for Chinese businesses and allow the market to play a bigger role in pricing loans.

“We hope China will actively move in that direction.”

Even though Lipton did not say how much the Yuan is still undervalued, it is a significant change to the last IMF report in the year 2011. At that time in 2011 the Yuan has been assessed to be “significantly” undervalued in a range between 3 and 23 %, depending on the methodology being used. (Washington Post)

Both candidates, Romney and Obama, deliver the picture that they will bring back jobs from China to the U.S. once they will get China to a further appreciation of its currency. Is that in line with the available data?

U.S. Manufacturing Jobs (Bureau of Labor Statistics)

In the U.S. the jobs in the manufacturing sector are declining steadily since the 1980s. Estimates say that about 2.4 Million jobs (including manufacturing) were shipped from the U.S. to China in the period between 2001 and 2008. (

USD/ Yuan Exchange Rate (

By looking at the last ten years of the USD / Yuan rate one can see that the Yuan has appreciated significantly in value against the US dollar. While in June 2001 one USD was worth 8.25 Yuan, in November 2012 one USD was worth 6.24 Yuan. Thus the Yuan has appreciated in value, while the USD decreased in value. Did the depreciation of the USD bring a lot of new jobs in the manufacturing industry? Not significantly, as we could see above.

It is not clear, if the Yuan is still significantly undervalued compared to the US Dollar or only at a moderate rate. The trend is that China is opening itself more to a marked based economy and that the Yuan will appreciate further in the long run to reflect its real value.

Nevertheless the available data does not suggest that a further appreciation will bring back many jobs (especially in manufacturing) to the U.S. from China.

Also the currency manipulation is only of the measures that help China to keep its wages low. Other measures are: Different labor-rights, direct government subsidization, different environment policies, overlook of property theft and piracy, and policies that limit market entries from abroad. (

Will stronger U.S. trade policies force China to play “fair”? Probably not. Tariffs on imports from China, will lead to China enforcing tariffs on U.S. products. On the other hand China is holding a lot of U.S. debt. If China stops buying U.S. debt it will get more difficult to the US to borrow money. Does the U.S. really want that?

It is clear that not matter who will be the next president, both will take steps regarding the U.S. China trade policy, but it is not clear what impacts these measures will really have for the U.S. economy and if they are significant.


Big Mac Index:

Finance Yahoo:


Washington Post:

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