US - China and the Currency War

From the Financial Times-
'China's currency traded briefly outside its tightly controlled band on
Friday, triggering a renewed wave of speculation that the government was
preparing to allow a long-expected revaluation.

The unexpected price move followed weeks of international pressure on
China to allow the renminbi to appreciate. But the People's Bank of
China, the central bank, said it had made no decision to change its
exchange rate policy.

A spokesman blamed “technical problems”. But some dealers speculated
Beijing had allowed the renminbi to appreciate as a “dry run” to see how
far and fast it might rise.

Traders said the renminbi, pegged to the US dollar for a decade, was
briefly in the market at a rate of Rmb8.2700 to the dollar, outside the
usual band of 8.2760 to 8.2800.'

The background for this news story and the relation between the US and
China vis-a-vis the currency situation- China for the last ten years has
pegged its currency to the US dollar. But over the years the trade
relation between US and China has become severely lop sided in favor of
China. Coupled with this is the fact that the US has had record trade
deficits in the last few years. The Americans believe that if China
allows its currency to float in the free market, then it will revalue
i.e go up in value. This will make American made goods more competitive
and help the balance of trade. Since there is tough trade competition
among countries in East and South East Asia for trading with the US, if
China allows its currency to go up then other countries will also
tolerate stronger currencies. All this will help US claw back on its
trade deficit.

Everybody wishes the answers to world economic problems were this simple
:) Firstly US trade deficit with China is only a small part of their
entire trade deficit. Their problems in this regards are much deeper.
Secondly if the Chinese are pressurised into floating or revaluing their
currency (I am not sure the chinese can be pressurised into anything !)
it is not clear how well they would be able to manage this and what
effect this would have on the world economy. But i guess people in the
US are becoming impatient and there have even been moves towards
protectionism i.e trying to impose tarrifs on Chinese goods. Ofcourse
most of these moves are against WTO regulations and finally how many of
them get passed into action will have to be seen.