Why is China trying to hold down the values of the yuan?

Answer 1

There can be many answers to your question. Depending what perspective you choose. It's also important to know that many newspaper and magazines talks about this issue currently. To understand this question, you need to know the basics of the exchange rate market. However, I shall refrain myself from using the term "to hold down the values of the yuan". As there are many conflicting issues regarding this, and I shall be neutral on this. From my understanding, the appreciation or the increase in the value of the yuan can be a challange to the Chinese economy. In simple terms, the appreciation of any currency, will have serious consequences to it's export industry, as the price of the exported products will increase, hence affecting the employment in the country. In China, at the moment, the exporting industry is growing at tremendous speed and volume. Products are made in China and exported worldwide, as raw materials or labour cost is lower in China. If the appreciation of the yuan is too sudden or too fast, the export industry in China can be affected. This can further affect other economic variables like employment from this sector and China's competitive advantage. Since China is a large and populated economy, a gradual and flexible appreciation is the best option, as it allows the economy and it's workers to adapt. Apart from this reason, the appreciation of the yuan should technically mean a higher purchasing power of it's people. As the yuan appreciates, there should be an increase in the consumption in the society. This is a shift from a nation which sells things to a nation who buys things. However, at the moment, the volume of consumption is low, as reported in some newspaper. This is because there are some issues faced by the country like a proper pension system for everyone, which makes people save more instead of spending. This means that if the appreciation of the yuan is too fast, without changing the economic structure of the country, can bring imbalances to the economy. By not allowing a flexible and gradual increase in the yuan, it can derail the economy. At the moment, what China is doing is to allow a steady and sustainable increase in the yuan, in tandem with transformations in it's economy, from it's institutions to the society.

Moreover from the nicely written above answer, if China does not 'hold down' the value of Yuan, for which it rises, and in turn, the accordingly value of USD decreases, thereby reducing the actual value of all US treasuries held by China, therefore only needing to pay less. This might be a trick played by the US.