US- China Currency War

As if the world economy is already not fragile enough, politicians in the US and China seem intent on fighting an old fashioned currency war. Personally, I feel the US is more wrong than China here..... and if not stopped soon, the two countries may send the world back to an age of barter system....

This battle concerns China's desicion to 'peg' it's currency, the yuan, to a fixed rate. The Yuan is deeply undervalued, fueling china's exports and harming the US. If the Chinese would only let the yuan float, it would only soar in value and china's export advantage would fall.

I read an article where President Obama has picked up this theme, calling recently for Beijing to adopt a more market oriented exchange rate. The US congress has also made a demand that unless China let's the Yuan rise in Value, the US should impose tariffs on Chinese goods... Just what the world needs: A Trade war.

By maintaining a fixed Yuan- Dollar rate, the Chinese believe that they have actually served the world economy well... It has lead to an explosion of trade,they say, cheaper goods to the US, thereby raising the US living standards, and prosperity to tens of millions of Chinese.

For years, the US establishment has been pressing China to revalue the yuan in the name of reducing the US trade deficit. But isn't much of the trade deficit due to intra-company trade, with US companies outsourcing production to China and India to stay globally competitive. At least, that's how i am made to understand this....

China is right to resist the US call to revalue, because a large revaluation could damage China's growth. China should learn from the experience of Japan, which had bowed to similar US pressure and had revauled the Yen. This was probably one of the reasons for the domestic deflation in Japan.

This is not to say that China's current arrangement is ideal. By not adopting a market oriented exchange rate, it has blunted the yuan's development as a tradable currency. This is probably why China sits on 2.5 trillion in dollar reserves.China's build up in dollar reserves is contributing to the world's anger at China. This represents a huge misallocation of Global resources.

If a solution to this is not found soon, war on Terror may find a back seat in world affairs, and countries may soon start focussing on pegging there currency, just like China does......