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American jobs vs. China's currency: Is the yuan too high?

The value of China's currency, the yuan, is one of the most hotly contested issues in US-China relations. The US says a high yuan is costing American jobs. But it also keeps consumer items, like TVs and computers, inexpensive. Will China soon adjust the value of its currency?

By Jonathan AdamsCorrespondent / April 13, 2010

An employee at the Huaxia Bank in Shenyang, China, counts US bank notes while flanked by stacks of Chinese currency.

Sheng Li/Reuters

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Washington agreed to postpone releasing a report that would have labeled China a currency manipulator. On Monday, Chinese Premier Hu Jintao and President Obama spent little time discussing this source of ongoing tension in US-China relations. Many analysts suspect that China will soon quietly adjust the value of its currency, the yuan.

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Here's a short Q&A on this complex issue:

How does the value of China's currency affect the average American?

The value of China's currency, the yuan or renminbi, affects the price of Chinese-made goods sold in the United States by retail stores such as Wal-Mart.

A cheap yuan makes Chinese products cheaper in the US. A stronger yuan would make TVs, computers, and other things made in China more expensive for American consumers.

Goods from China now make up nearly 20 percent of America's imports. In 2009, top imports from China included electrical equipment, apparel, toys and games, and furniture.

But US manufacturers are hurt by a cheap yuan. They say Chinese goods are sold at a sharp "discount" in the US. For example, a Chinese-made chair should sell for $100 in the US if the yuan was fairly valued, but now sells for $75, they say – undercutting American competitors, and thereby costing American jobs.

Is China's yuan really undervalued?

Most economists say, "yes." As evidence, they point to China's massive foreign-exchange reserves and its huge trade surplus.

The rapid growth in China's foreign-exchange reserves means China's central bank has bought huge numbers of US Treasury notes and other foreign currencies to keep down the value of the yuan. Last year alone China's foreign reserves increased by $450 billion, to total $2.4 trillion.

China's trade surplus means it's selling the world far more stuff than it's buying. Some observers look at that growing gap and infer that Chinese goods are too cheap abroad – and therefore, that the yuan is also too cheap.

The International Monetary Fund has also said that China's yuan is undervalued.

But a few prominent economists dispute this notion. They include Goldman Sachs's chief economist, Jim O'Neill, and Shanghai-based independent economist, Andy Xie. Mr. Xie says it's wrong to conclude from China's trade surplus that the yuan is undervalued. And he says China's yuan may even be overvalued due to speculative "hot money" that's fueling a property bubble in China and putting sharp upward pressure on its currency.

"China is in a huge mania," says Xie. "The No. 1 issue isn't the exchange rate, it's financial mania."

But don't market forces determine currency value?

China's currency markets are not free or completely open. China's central bank intervenes in its currency market to control the value of the yuan.

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