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American jobs vs. China's currency: Is the yuan too high?

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Most economists say, "yes." As evidence, they point to China's massive foreign-exchange reserves and its huge trade surplus.

The rapid growth in China's foreign-exchange reserves means China's central bank has bought huge numbers of US Treasury notes and other foreign currencies to keep down the value of the yuan. Last year alone China's foreign reserves increased by $450 billion, to total $2.4 trillion.

China's trade surplus means it's selling the world far more stuff than it's buying. Some observers look at that growing gap and infer that Chinese goods are too cheap abroad – and therefore, that the yuan is also too cheap.

The International Monetary Fund has also said that China's yuan is undervalued.

But a few prominent economists dispute this notion. They include Goldman Sachs's chief economist, Jim O'Neill, and Shanghai-based independent economist, Andy Xie. Mr. Xie says it's wrong to conclude from China's trade surplus that the yuan is undervalued. And he says China's yuan may even be overvalued due to speculative "hot money" that's fueling a property bubble in China and putting sharp upward pressure on its currency.

"China is in a huge mania," says Xie. "The No. 1 issue isn't the exchange rate, it's financial mania."

But don't market forces determine currency value?

China's currency markets are not free or completely open. China's central bank intervenes in its currency market to control the value of the yuan.

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