After more than a decade, the Chinese yuan is finally being decoupled from the U.S. dollar. The yuan will now float against a basket of foreign currencies. China has been under increasing pressure from the U.S. to make such a move. In fact, U.S. Treasury Secretary John Snow has complained that continuing to peg the yuan to the dollar was tantamount to subsidizing companies, and threatened retaliatory trade sanctions if China failed to take corrective actions. Analysts, however, note that China is only revaluing the yuan by two percent, so the net effect is negligible given that estimates have the yuan as being undervalued by as much as 40 percent. China is reluctant to make a significant change to the yuan because its economic policy centers on growing exports, and the undervalued yuan amounts to a 33 percent subsidy to exporters. Eliminating the “subsidy” results in a loss of competitiveness for Chinese exporters, and an increase in competitiveness for American exporters. The question now is whether China will take steps to further revalue its currency. Analysts seem to believe that political pressure and internal pressures will force China to continue to continue to revalue its currency, a move that could have repercussions in other parts of Asia. There is also some concern that inflationary pressures will rise in the U.S. if China makes any significant moves to revalue its currency. This video fits in well with the material on the IMF and the global capital market. In addition, it can be used to supplement the discussion of instruments of trade policy. Discussion Questions

1. China, which has been under strong political pressure for some time to revalue its currency, has finally agreed to do just that, only in a very small way. Is this move by China a win for the U.S. or a win for China? What are the political implications of this action?

2. Until now, China’s currency valuation has represented a significant subsidy to Chinese exporters, a situation that is seen in a negative light by American exporters. However, as a beneficiary of cheap goods made in China, how do you feel about the U.S.’ efforts to force China to raise its currency?

3. After more than a decade, the value of the yuan has risen relative to the dollar. While the revaluation amounts to just a two percent difference at the moment, there is speculation that the Chinese will continue to allow the yuan to rise. What effect will this initial movement have on Chinese workers and consumers? What are the effects if the yuan continues is ascent?

4. China’s revaluation of the yuan was echoed in other parts of Asia. For example, in India, the rupee appreciated, as did the Japanese yen. Consider the implications of further currency revaluations for the Asian region.