Tension between US and China concerning possible Chinese currency manipulation

The past several years has seen increasing tensions between China and the United States. These tensions have arisen from threats of a possible impending currency war between both powers as the United States, under Barack Obama’s administration, has claimed that China unfairly manipulates its currency to gain an unfair trade advantage. Just last month, President Barack Obama participated in the G-20 Summit in Seoul, Korea with one main goal in mind, to limit China’s and other countries’ ballooning current account surpluses.

Besides the fact that the Chinese and Americans are partners on many fronts including dealing with the economic crisis. But, over the years, the dispute between China and the United States has escalated because both countries are hurting each other in different ways economically.

On one hand, the Chinese want the United States to tame its sky rocketing debt as Chinese holdings of U.S. Treasury debt is peaking at almost 1 trillion dollars. In 2009, this figure hit roughly $850 billion. Though some statistics show that it has decline during the second half of 2009, many analysts say that the economic giant, China, owns much more Treasury securities than official statistics indicate. China simply wants the United States to decrease their ballooning debt figures.

On the other hand, the United States argues that there is an increasing trade deficit between both countries that is favoring the Chinese and hurting the Americans. China’s current account surplus with the U.S. in 2010 is expected to run to $250 billion which is far more than what any other country has with the United States.  Countries that have large current account surpluses save more than they can invest in their home country than invest their funds abroad. Countries that run a current account deficit save less funds for investment needs and spend it all to attract investors from abroad. Since China is running a large current account surplus, it is investing much of its funds in the United States. This can be seen as an upside because it provides Americans with more capital that they can use making them more productive and helping them earn a higher wage. But, despite this, China’s investment in the U.S. is also not good for the country.

As a result of this current account surplus, the United States has accused China of manipulating its currency. Indeed China is manipulating its currency as it is “pegging” its value to the dollar but the American did it too in the 1940s fixing its currency to other nations, if they weren’t accused of unfair trade practices then, people argue that the U.S. doesn’t have a right to accuse others of currency manipulation.

Both countries though are hesitant in really becoming aggressive to get their way. China and the United States are both heavily reliant on each other for their economies to thrive and survive. Though China is owed billions upon billions of dollars by the Americans, they are hesitant in asking for it back as it is American demand for Chinese-made products that has been a major driver of Chinese economic growth over the past decade. The Americans on the other hand are indebted to the Chinese and are hesitant to aggressively deal with the current account surplus plus problem as they are indebted to China, literally, nearly $850 billion loaned to the United States.

At this point, the United States wants China to print fewer Yuan to increase its value, what the government fails to realize is that getting the Chinese to limit the printing of the Yuan will not increase the price of Chinese goods or bring a change to the US’ current account deficit. China and the United States need to watch their actions or else their trade wars will spill over to the global currency markets and affect countries’ exporters.

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