Last week the Chinese government announced that it will move closer to allowing its currency, the yuan or renminbi, to float in the world economy. This move will slowly break it away from being pegged to the weak U.S. dollar. A practice which U.S. politicians, and the International Monetary Fund, claim is undervaluing China exports by as much as 40%.
Washington's hope is that the appreciation of the yuan would make Chinese imports less attractive versus domestically manufactured goods. This would then create more U.S. manufacturing jobs and help stimulate an otherwise stagnate economy. In addition, many experts feel this higher valued yuan would also help slow the increasing U.S. trade deficit with China. The deficit hit a record $273 billion in 2011, making up almost 43 percent of the entire U.S. gap.
Congress has threatened to impose higher tariffs on Chinese manufactured imports if Beijing does not take more aggressive action to properly value its currency. But the Obama administration feels that diplomacy is a better approach so that we do not start a trade war.
Keep in mind though, while the strengthening of the yuan will lead to many benefits here stateside, it will ultimately lead to price increases for our customers.