IntroductionOver the last ten years, Yuan (CNY), the Chinese currency has experienced a high inflation rate, and the compounded annual inflation rate is about 22 percent compared to the U. S compounded annual inflation rate of about 3%, which has led Chinese policymakers to continuously come up with policies for tackling the decade-high inflation period to no avail. The current round of inflation began in 1994 and was associated with the rise in the prices of food products. Control of inflation and stabilization of market prices have become China highest priorities. Since 1994, the Yuan has been “pegged” to the U. S.
dollar initially with a value of more than 8.6 Yuan for a dollar (Tatom 2007). The stabilized value was 8.27 to 8.28 for one dollar between 1998 to July 2005; there was an utmost day-by-day rise and fall to around a mean value of 0.3%. The currency value of any country is dependent on the productivity, economic growth, foreign investment, foreign exchange surplus, interest rate, and political stability. A currency normally appreciates when there is economic growth, increased productivity and foreign direct investment inflow, increase in exports as well as building of reserves in Central Bank (Madura 2011).
Almost all of these factors have been helpful in China for the last ten years. When China partly floated Chinese Yuan between 2005 and 2008, there was an appreciation from 8.276Yuan/USD to 6.827Yuan/USD. United States2000200520072008GDP (Current US $9,764.8012,376.1013,751.4014,204.32GDP growth (annual %)188.8.131.52China2000200520072008GDP (Current US $1,198.482,235.913,382.274326.19GDP growth (annual %)8.410.4139Source: World Bank, World Development Indicators 2009The table above shows that China Gross Domestic Product increased to USD 4.3 trillion in 2008 from USD 1.2 trillion in 2000, this was almost 300% growth.
At the same time, the US Gross Domestic Product increased to USD 4.3 trillion in 2008 from USD 1.2 trillion in 2000, which was a 45% increase. The trade tensions, political pressure, and market pressures instigated the alterations in the Chinese currency policy. China reinitiated the direct peg of the Yuan to the US Dollar in 2008 and this happened as China experienced a 25.7% decrease in export and a considerably higher number of unemployed workers. As the US depreciated with other currencies, the prices of goods bought by China continued to increase and this acted as the driving force of the Yuan inflation (Stanford 2005).
Controlling inflation is a key priority in China, and a Yuan appreciation would curb the inflation. US-China TradeThe bilateral trade amid the U. S. and China has been particularly high and this has benefitted both countries. In 2000, the exports by China to the U. S. amounted to US$52.1 billion and increased to US$ 162.9 billion in 2005 (a 212-percentage increase) (China Customs statistics 2005). According to the custom statistics in the US, in 2000, the exports by US to China amounted to US$ 16.2 billion; however, they increased by 157% to reach a high of US$ 41.8 billion in 2005.
US exports to China are relatively high than most of the other US trade partners. In 2000, China was ranked fourth in terms of import trade partners and eleventh in export trader, though by 2005, China was ranked third among U. S. leading trade partners, the fourth leading trade export partner, the second major import trader compared to Japan, Mexico as well as Canada (Morrison 2011).
By 2005, China was US strategic trade partner. China’s exports to US was US$243.5 billion and accounted for 32% of China, US$762 billion overall exports as well as 14.6% of U. S. overall imports. The two countries also boasted remarkable achievements in financial c-operation with China holding US$ 254.4billion in U. S. treasury bonds as well as a significant sum of U. S. private securities and business stocks in 2005. At the start of 2006, the foreign reserves in China increased to over US$810 billion with 60% being U. S.
capital (Morrison 2011). This shows that the US and China were big markets for each other in this period.