Furthermore, in order to avoid feud with international institutions like the IMF and WTO as well as some trade partners, Chinese officials said that before they begin to change the value of their currency, a long-term stability would be needed in order to avoid dislodgment in their economy (Sanford 2005). Chinese officials have announced a new exchange rate on July 21, 2005. This review of literature will focus on the implications of the undervalued Yuan to China and U.S. as well as its other trade partners and the effects of a revaluation to the economy of China and U.S.
1. China’s total foreign currency reserves have amounted to $346.5 billion, currently the worlds’ second largest after Japan. This reflects the strength of Chinas exports and its ability to attract foreign investment. As a result, some of Chinas trading partners claim that their trade deficits are aggravated by the undervalued yuan. An example of this is China’s part in the contentious U.S. trade deficit wherein China is accounted for 21 per cent of the US total trade deficit (Taylor, 2006). Some experts claim that once the Chinese currency revaluation and appreciation. market forces will drive the currency upwards, thus lessening the trade gap. The current situation and value of the Chinese currency is similar to the Japanese yen in the early 1980s. Japan was accounted for half of the USs trade deficit during the 80s. The 1985 "Plaza Accord" forced the yen to rise against the dollar.
2. The undervalued yuan brought major incursions of capital both from domestic and foreign speculators. Local companies are using the current economic situation wherein Chinas capital market remains closed, to divert their export earnings back to China, a different event after so many years of limiting their Yuan holdings. Foreign currencies are also flowing in through the black market.