What is the effect on US and China's economies with the historic low exchange rate?

Question

the exchange rate between US dollars and Chinese Yuan was about 1:8 for many years. Yet recently it dropped to 1:7 to almost 1:6.8, what is the cause of this change and what is the effect on both countries' economies?

Answer 1

I do not know the specific reason for the recent change.  However, I know for years, the Chinese Government fixed the value of their currency at an artificially low level.  This was done much to the concern of other countries around the world.

When China's currency is low in relation to other country's, generally these other countries will be able to buy more goods less expensively by importing from China than they can by buying from vendors within their own countries.  This helps the Chinese economy, but may slow the economies of the other countries.

In general, a country benefits when exports increase and imports decrease.  China's policy of maintaining their currency at an artifically low level, helped increase their exports to other countries, while making it too expensive for other countries to sell certain goods to China.  This creates one-sided trade that, in this example, benefits China.

Based on the above, China's move to slightly increase the value of its currency, to many other countries, is a move in the right direction.  This will make it somewhat easier for the US to sell to China, which helps the US economy.

Lastly, keep in mind that the value of one currency compared to another currency, is a two-sided proposition.  If the value of China's currnency remains stable, but the US's currency declines, China's currency will strenghten in relation to the US currency even if China does nothing.  I am not saying that China did nothing.  I am just saying you should always keep in mind the complexity involved when analyzing currency's.