The story discusses Treasury Secretary Timothy Geithner's criticism of China's monetary policy pegging the Yuan to the value of the Dollar. For years China has been using this system to artificially devalue their currency, an important part of their economy. If their currency was allowed to float with the dollar and the Euro, China would be in serious trouble. The reason for this has everything to do with exports.
China is an export-based economy. Without the massive amount of exports leaving their country, the main pillar of their economy fails, and the rest of the economy around it (presumably). This facilitates the need for a low-value currency. The United States is experiencing the effects of a low-value currency right now with increases in exports.
But the under-valued Yuan creates problems for those who trade with China. For example, in 2009 the U.S. trade deficit with China was over 226 million dollars. This year the deficit is at 145 million as of July. Last year in July, that number was 123 million. This shows that even though the U.S. economy has been suffering this past year, imports from China have only increased. In fact, if we look 10 years back to the year 2000, our trade deficit with China was 83 million for the year.
Secretary Geithner has a difficult road ahead of him if he hope to control the trade deficit with China. But the solution will not lie with the Chinese.
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