Currency Stalemate at U.S.-China Meeting

Once China de-pegged the yuan from the U.S. dollar on July 21, 2005, the exchange rate issue faded as a major irritant in U.S.-Sino relations. Since then, the yuan, also known as the renminbi or "people's money," has gradually strengthened by more than 20%, to its present level of 6.88 against the greenback. The stronger yuan, along with rising labor costs in China and the cancellation of preferential policies for Chinese exporters, have been pushing factories in the Pearl River Delta (BusinessWeek.com, 3/27/08) region into bankruptcy or overseas to Vietnam, Indonesia, or other emerging markets.

Now controversy over the yuan's exchange rate has reared its ugly head again. After peaking at 6.82 against the dollar on Nov. 28, the yuan has started to depreciate. With China's export growth slowing down to 19.2% in October as consumers in the U.S. and Europe tighten their belts, economists are wondering if China will allow the yuan to weaken even more to boost export growth. After all, the yuan is the only emerging market currency to strengthen against the dollar so far this year, meaning China's exports are losing competitiveness vs. other Asian countries.