China and the depreciating U.S. dollar

Publication Date: January 2006

Publisher: East-West Center

Author(s): Richard C. K. Burdekin

Research Area: Banking and finance; Economics

Type: Report

Coverage: China

Abstract:

Over the past five years, U.S. exports to China have been dwarfed by imports from that country, with the resulting trade deficit igniting a bout of China bashing reminiscent of the Japan bashing of the 1980s. A major culprit in the trade imbalance, according to many U.S. analysts and policymakers, is China's currency: the renminbi, they say, is too cheap relative to the dollar. Some are calling for high tariffs on Chinese goods or for further exchange-rate adjustment that would revalue the renminbi significantly upward, making Chinese goods less competitive. But with just 10.4 percent of total U.S. trade attributed to China in the first half of 2005, it is unrealistic that any renminbi exchange-rate adjustment could rein in the burgeoning U.S. trade deficit. And if the adjustment were drastic the United States could be the big loser: driving China out of the market for U.S. treasuries would most likely have calamitous consequences, not only for the dollar but for U.S. credit markets and for the U.S. economy in general.