Why China Would Not Appreciate its Currency?

In order to keep 1.3 billion fed and employed, China has to stay competitive in the global economy. One way to do achieve that is for China to keep its currency undervalued.

A simple example:

If 1 CAD = 6 RMB (Renmingbi):

Mr. Chen has to sell his handmade widget for 600 RMB a piece in order to cover his cost and make a small margin. Ms Smith in Toronto can buy this widget for equivalent of 100 CAD.

If 1 CAD = 5 RMB:

Mr. Chen's 600 RMB handmade widget will cost M Smith in Toronto 120 CAD to buy instead of 100 CAD.

Therefore, in order to protect China's economy, the Chinese government wants to protect its investors first. China actually appreciated its currency from 2005 to 2008 . Consequently, its export industry suffered a 20% decline. Many factories had to shut down. People even started protests. In respond to the financial crisis that started last year, China depreciated its currency again. This is probably one of the reasons why China is able to recover faster than the rest of the world from the crisis.

So why are countries like USA and Canada are putting pressure on China to appreciate its currency again? Don't they want their businesses to be able to buy cheap products from China? There are a few reasons why.

1. This one is the obvious. Less businesses would move their operation to China and less Canadian jobs would be lost.

2. Strong currency means stronger purchase power for the Chinese people. This enormous potential purchase power (which can possibly be the world's largest) can drive the rest of the world to make more and sell more products.

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