Foreign Currancy Essay Example | Topics and Well Written Essays - 1000 words

Foreign Currancy - Essay Example It is even predicted by the IMF that it will overtake the US economy by 2016(Economy Watch, June 2, 2010) In November 2011, U.S. debt to China amounts to $1.13 trillion. This is 25% of the total $4.6 trillion of US debts. In 2011, China exported $1.58 trillion worth of production, 18% of which is exported to the US, while it has imported $333.9 billion from US, creating a trade deficit of $295.5 billion.(Kimberly, Amadeo). This massive surplus is the effect of China’s monetary policy of keeping their Remnibi lower than the equilibrium rate. This monetary policy is the subject of debate of IMF, the World bank, the government ,and other financing bodies. However, despite its robust economy, its GDP per capita income has remained relatively low as compared to United States. China’s GDP per capita is $4,428 while US has $47,153.(The World Bank) In effect, China is not subsidizing US economy because both countries benefit from the deal. The proceeds of the US debts are spent on federal programs while payments of interests of loan is spent by China to propel its economic growth. US debts also kept interest rates low. It is threatening because by holding too much ownership of U.S debts, China can use it as an economic weapon and shift the economic balance in its favor. Being second greatest in the world’s economy, China can use this power as leverage for imposing demands. For instance, in 2009, China proposed for a new global currency to replace the dollar because it was alarmed of the drop of dollar rate, and was afraid that its investments would deteriorate (Macdonald, Joe. 24, Mar. 2009). China has been reported to feel uneasy about relying on the dollar to store its reserves. It has also pressed for changes to give developing countries more influence on the IMF, the World Bank and other financing institutions. To reduce its complete reliance to dollars, China now swaps currency with G-20 trading partners like Hong Kong and Argentina. G-20 is a group of finance ministers and central bank governors from 20 economies and was formed to discuss the international financial system. To date, there is no report on the success of this proposition. What is its impact to the U.S. economy? The reduction of China’s demand for dollars leads to a domino effect – increase of interest rates that would hamper revival of the economy. Threatening to pull out all of its holding from the US will create havoc because if China calls its debts all at once; demand for dollars would be increasingly high, causing a dollar collapse that would disrupt international markets. This would trigger another financial crisis wherein everybody suffers including China (Kimberly). This is more unlikely to happen because it will reflect of China’s competitiveness. When China raises its export prices, US consumers will think twice and buy US products instead. As a policy, China keeps its currency Remnibi, lower than the dollar, a strategy that works for its advantage because it makes product imported from China lower than the U.S. products, and in the final analysis, be able to create more jobs for the Chinese, and be able to fund the growth of its economy. The US is trying to persuade China to revise its policy of having an undervalued Remnibi. The Remnibi is said to be 40 percent below it real value thus making its products excessively low and the US exports comparatively high, but whether this will be heeded by the Chinese government remains to be seen in the light of recent