9/2/2011
3:42 pm
China is the second largest economy after the US which means they have a lot of influence in the global economy. The US has stated that further economic assistance will be postponed placing China in the forefront to step up and do what it can to ease global economic tensions. One way to achieve this is to let the RMB rise more rapidly although, this would also make Chinese exports more expensive. China has kept a tight grip on the RMB for a long time but, in the face of inflation fears have loosened their grip and let the RMB float upward.
China has been turning their face to letting the RMB rise for almost a decade. Many countries have accused China of artificially keeping the RMB low to make the price of their exports more appealing. Since we are interdependent a low RMB hurts the rest of the world in that it makes Chinese goods dirt cheap and sends a message to companies to go there because they can make massive amounts of money at extremely low costs. Also, China has an enormous labor force that will work for really low wages. Other countries simply can’t compete. Not only do we depend on China but China also depends on us. If consumers aren’t buying their goods then they too feel the economic pinch. A low RMB is a double-edged sword. If China doesn’t raise the RMB then they face inflation. If they keep letting the RMB rise then their exports become more expensive and other countries won’t buy them.
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