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Home Publications Blogs Beat the Press If the United States Loses Its Aaa Rating Will China Raise the Value of the Yuan Against the Dollar?

If the United States Loses Its Aaa Rating Will China Raise the Value of the Yuan Against the Dollar?

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Thursday, 21 April 2011 04:23

This is the logical implication of the threats reported in a Reuters article, saying that China would cut back its investment in U.S. government bonds if the United States loses its Aaa credit rating. The article implied that this threat is something that would be scary to the Obama administration.

In fact, it should not be scary at all, since China is effectively threatening to do exactly what the Obama administration claims it is asking them to do. The Obama administration claims that it wants China to raise the value of its currency against the dollar. The way that China keeps the value of its currency down is by using the dollars it accumulates as a result of its large trade surplus to buy government bonds and other dollar denominated assets.

If China stopped buying government bonds, then the dollar would fall against the yuan (i.e. the yuan would rise), exactly what the Obama administration supposedly wants. This would make Chinese goods more expensive in the United States, leading us to buy fewer imports from China, and it would make U.S. exports cheaper in China, leading China to purchase more U.S. exports.

This sort of adjustment is necessary to get the U.S. economy on a stable growth path. Therefore this threat from China should have been viewed as a positive development. It was not reported this way.

Comments (3)Add Comment
To Fox From Br'er Rabbit: Please Don't Throw Me in the Briar Patch
written by izzatzo, April 21, 2011 6:14
Dear China Fox,

You can increase your exports to us and reduce our exports to you any way you choose but please, please, don't reduce your investment in USA debt just because it's downgraded by a ratings agency. Yields on Briar Patch Junk Bonds are especially attractive given their low prices.

Regards,

USA Br'er Rabbit
Well yeah, but
written by paul, April 21, 2011 8:53
China is not going to cut back on buying U.S. T-Bonds no matter what S&P rates our debt.

Chinese leaders are much smarter than ours because they realize that China's economic and political strength derives from job growth and increases in the wealth of workers. Consequently, protecting and increasing good jobs at good wages in China is their top priority, unlike the U.S. where that is a very low priority despite voters' desires for more jobs.

China's commie government is more responsive to the needs of its people than our democracy. Who'd a thunk it.
It won't affect the Yuan/Dollar ratio
written by Patrick Tchou, April 24, 2011 8:06
S and P rating, whether China stops buying US bonds won't affect the Yuan/Dollar ratio. It will only make it more expensive for the Fed to sell bonds as it will have to raise the interest rate to attract buyers. China arbitrarily sets the Yuan/Dollar ratio. Why would any market forces affect it in the short term? Frankly, the inflation rate in China is what will eventually force the correction of this monetary exchange rate.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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