Is China’s currency really undervalued?

A question from Yahoo! Answers:

China’s currency is artificially cheap because they control the exchange rate. Why can’t the U.S. do the same

What is good for the goose is good for the gander. Could the U.S. make the yuan only worth 5 or 7 yuan?

Your basic premise is wrong. China’s currency may actually be artificially expensive.

Two currencies are at a fair value relative to each other when their respective economies are in external equilibrium (exports are approximately equal to imports) AND in internal equilibrium (unemployment is at a non-inflation accelerating level). You seem to be basing your reasoning on external equilibrium alone, while completely ignoring the internal equilibrium. China has an enormous frictional unemployment (every year, enough people move from countryside to cities to populate a city the size of Houston), so all things considered, its currency may well be overvalued.

Also, consider this. China consistently has a higher inflation compared to the U.S., yet the yuan is not losing its value relative to the dollar, which is a sign of the currency value kept artificially high (sort of like the Argentinian peso during the currency board period).

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