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June 21, 2010

China allows Yuan to appreciate

POLITICS - China normally keeps the yuan artificially low to boost exports. A cheaper yuan makes it easier for foreigner to buy lots of cheaply made Chinese goods and then sell them overseas. This gives China an unfair financial edge on the global market.

Today however the Chinese government allowed the yuan to appreciate upwards in value, signaling greater confidence in China's domestic economy. This also makes it easier for China to import raw materials and goods from other countries.

This will likely only be a temporary rise in the value of yuan. China has done this before on numerous occasions, allowing the yuan to rise a little and then stopping at a new value.

China maintains this "pegging" of the yuan by buying up billions of foreign currency (usually U.S. dollars) per year in an effort to drive up the value of those foreign currencies and thus maintains the relative values between the USD and the yuan.

It should be noted that China has such a huge stockpile of foreign currencies that they frequently lend it out to other countries (including the United States which is suffering under a national debt of $13.138 trillion). Which is ironic because the US economy is suffering due to outsourcing of factory workers overseas and wouldn't be in their current predicament if it wasn't so much cheaper to hire overseas workers.

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