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Put this in the category of "we'll believe it, when we see it." There was more speculation in the financial markets Friday regarding a possible move by China to let its currency, the yuan, appreciate slightly versus the dollar in the weeks ahead.

 

China keeps the yuan pegged at roughly 6.82 yuan to the dollar. U.S. manufacturers charge that the peg artificially undervalues China's exports, giving China's companies an unnatural competitive advantage. China counters that the fixed yuan is necessary for its embryonic, vulnerable economy, and that the world benefits from cheaper goods.

 

However, two forces -- rising protectionist sentiment in the U.S. and rising inflation in China -- may push China in a direction that Beijing has not wanted to go: toward a stronger yuan.

 

Inflation rose at a 2.7% annualized rate in February in China, ChinaDaily.com reported. That's roughly double the 1.5% annualized rate recorded in January. Part of the increase can be attributed to seasonal factors: for example, food prices rose at a 6.2% annualized rate in February. Nevertheless, part of it is due to the fixed-rate yuan: as a result of the yuan's peg to the dollar, when the dollar weakens and companies outside of China raise the price of goods to compensate for it, it automatically pushes up China's costs to purchase those goods.

 

Monetary Analysis: What will it take to get China to let the yuan appreciate 10% this year? Maybe double-digit consumer inflation in China. Tariffs by Congress on Chinese goods import also could nudge Beijing, but at this juncture Congress is unlikely to impose them, due to concern that an all-out trade war that could ensue. It was tariffs and protectionist sentiment, among other restrictive measures, that deepened and lengthened the Great Depression of the 1930s.

 

I am no economist, so can someone explain to me why China would keep their currency down and now have it slowly rise against the USD?

 

Not sure if what I am thinking is a negative thing or positive thing. If things start getting more expensive to be manufactured in China, wouldn't that mean more jobs coming back here? When I am mean here back to North America.

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