China’s Currency Manipulation and the Effect on the United States

Derek Griest, Fraser Hunt, & Alka Shah

Stuck on U

SA • Essentially 1994 (1997 officially) until July 2005, it was pegged strictly to the dollar at about 8.28 Yuan to the dollar • Still believed to be vastly undervalued • Now adjusted nightly by Zhou Xiaochuan according to basket of currencies • Appreciated slightly since July 2005 • Accused of being currency manipulator

Value of the Yuan Against the Dollar Over Past 2 Years

Strength of U.S. Dollar Against Various Currencies: 2000-2005 Percentage Change Year 2000 South Korea Canada Japan China India Euro United Kingdom 2001 2002 12% 4% 4% 1% 12% 15% 0% 0% 7% 4% 2% -5% 5% -3% 2003 2004 2005 Total Change: 2000-2005 -10% 1% -10% -5% -11% -7% -7% -10% -10% -5% 0% 0% -1% 0% -15% -5% -10% -5% 0% -19% 0% -1% 0% -27% -9% -10% 0% -17%

Strength of U.S. Dollar Against Various Currencies: 2000-2005 Percentage Change Year 2000 South Korea Canada Japan China India Euro United Kingdom 2001 2002 12% 4% 4% 1% 12% 15% 0% 0% 7% 4% 2% -5% 5% -3% 2003 2004 2005 Total Change: 2000-2005 -10% 1% -10% -5% -11% -7% -7% -10% -10% -5% 0% 0% -1% 0% -15% -5% -10% -5% 0% -19% 0% -1% 0% -27% -9% -10% 0% -17%

Strength of U.S. Dollar Against Various Currencies: 2000-2005 Percentage Change Year 2000 South Korea Canada Japan China India Euro United Kingdom 2001 2002 12% 4% 4% 1% 12% 15% 0% 0% 7% 4% 2% -5% 5% -3% 2003 2004 2005 Total Change: 2000-2005 -10% 1% -10% -5% -11% -7% -7% -10% -10% -5% 0% 0% -1% 0% -15% -5% -10% -5% 0% -19% 0% -1% 0% -27% -9% -10% 0% -17%

Strength of U.S. Dollar Against Various Currencies: 2000-2005 Percentage Change Year 2000 South Korea Canada Japan China India Euro United Kingdom 2001 2002 12% 4% 4% 1% 12% 15% 0% 0% 7% 4% 2% -5% 5% -3% 2003 2004 2005 Total Change: 2000-2005 -10% 1% -10% -5% -11% -7% -7% -10% -10% -5% 0% 0% -1% 0% -15% -5% -10% -5% 0% -19% 0% -1% 0% -27% -9% -10% 0% -17%

Deficit

• Overall U.S. Deficit $726 billion of 2005 • Deficit of $201.6 billion with China for 2005 – Almost 25% • Due to the low currency rate of Yuan, we can import from them cheaply and exports are expensive for us.

Exports (Millions of Dollars)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 China 121,006 148,780 151,048 182,792 183,712 194,931 249,203 266,098 325,591 438,228 593,329 USA 512,627 584,743 625,073 689,182 682,138 695,797 781,918 729,100 693,103 724,771 818,775 China Growth 0% 23% 25% 51% 52% 61% 106% 120% 169% 262%

390%

USA Growth 0% 14% 22% 34% 33% 36% 53% 42% 35% 41%

60%

China's Minus the USA 0% 9% 3% 17% 19% 25% 53% 78% 134% 221% 331%

Reinvest

• China reinvests in the US economy • Feel that we are not going to default, though growing worried • Bonds and foreign reserves • Keeps our inflation low

Deficit Reinvestments Bonds, Equities etc.

M.A.F.D.

• Mutually Assured Destruction, now known as MAD 2 or MAFD (Mutually Assured Financial Destruction) • If China stops investing then the likely results are bad for them; world • US refusing to hone deficit and trying to hold it over China’s head

Jobless

• Due to cheap imports, there has been a loss of manufacturing which put people out of jobs, especially the textile industry.

18000 17000 16000 15000 14000 13000 12000 1990

Manufacturing Employment Level

1993 1996 1999 2002 2005

Protectionism

• U.S. wants to add duties 27.5% on Chinese imports until China allows its currency to float more freely against the dollar • To decrease bilateral trade deficit with China • Believed that effect could be minimal due to other countries • China feels prices are lower in U.S., therefore refuses to change currency policy