China currency drops against dollar

A Chinese bank employee stands in front of a currency exchange rate board at a bank in Shanghai on April 10, 2008.

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KAI RYSSDAL: We got the February trade numbers this morning. The deficit rose nearly 6 percent, kind of surprising when everyone had thought there would be a decline. A good part of the rising trade gap has been our imbalance with China, a condition not helped in our favor by the strength of the Chinese currency. It was pegged at just over 8 yuan to the dollar for many years. Beijing started let it trade somewhat freely in 2006. Washington's been vocal about its desire for more, and today the yuan fell below 7 to the dollar for the first time.

Marketplace's Alisa Roth reports, it's a case of being careful what you ask for.


ALISA ROTH: China's been keeping its currency artificially cheap. Most people say if the yuan could float freely it would actually be worth a lot more than it is. That would make American goods exported to China cheaper, so China would import more goods from the US, and the trade imbalance between the US and China would be, if not balanced, at least a little more even. David Solin is a currency consultant. He says it's starting to happen, sort of.

DAVID SOLIN: Any kind of strengthening of their currency will have the net effect of making price of US goods there cheaper.

Here's where the "sort of" part comes in.

SOLIN: There's no magic price per se, where suddenly, you know, Chinese consumers will say: "OK, we want all of these US goods."

Part of the problem, Solin says, is that it's not just exchange rates that determine how much an American product costs in China, or that make Chinese consumers want to, or be able to buy them. Among other things, inflation is very high in China right now, so everything costs more. That's partly because the yuan has been falling against other currencies, just not against the dollar. Ronald McKinnon is a professor of international economics at Stanford. He says the US might not really want that trade imbalance to correct itself.

RONALD MCKINNON: If China were to suddenly correct its trade surplus, that would mean so much less Chinese capital coming into the saving deficient American economy.

And that, he says, would cause a major credit crisis, much worse even than the one we're already in.

In New York, I'm Alisa Roth for Marketplace.

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