The peg

Looking at the currency exchange, however, many in the U.S. and Europe have long argued the renminbi is seriously undervalued, which gives Chinese exporters a strong advantage in the global marketplace.

The Chinese renminbi exchange rate has been pegged to the U.S. dollar at near 8.28/8.30 renminbi (CNY) to the U.S. dollar for the past decade. U.S. government officials have pushed for a revaluation since September 2003. The U.S. has criticized the peg at times, as renminbi appreciation could potentially help trim the mammoth U.S. account deficit.

Why does this matter? Some market watchers have said China’s currency peg to the U.S. dollar prevents correction of the U.S. trade imbalance. After all, as the dollar continues to weaken vs. the Euro and other majors, the renminbi falls with it. This helps China maintain an advantage in the world marketplace.

“The growth engine (for China) remained in the export sector in 2004,” says John Cairns, head of Asia research for Ideaglobal in Singapore. Glassman agrees.

“[Continued exporting strength] is a safety net for China, and it’s a driving force for much of their growth.” Glassman also notes that U.S. imports about $120 billion annually from China.