China is being pressured by the United States and other trading partners to allow its currency to appreciate, USDA says. In June 2007, the U.S. Treasury concluded that the Chinese yuan was undervalued and that the Chinese central bank's intervention in the foreign exchange market contributes to China's persistent trade surpluses and rapid accumulation of foreign exchange reserves. In response to pressure from trade partners, China's monetary authorities have allowed the value of the yuan to rise gradually since July 2005. However, Chinese policymakers are concerned that a sharp change in the exchange rate could result in economic dislocations and financial market instability, and they have adopted a go-slow approach to exchange rate policy reform. Many analysts believe a much larger appreciation is needed in order to narrow China's trade surplus.
Discussions about China's exchange rate are mainly focused on how appreciation of the yuan would affect merchandise trade and financial markets, but exchange rates have important effects on agricultural commodity markets as well (Shane and Liefert).1 As the yuan appreciates against the dollar, U.S. commodities will become more price-competitive in China, potentially increasing China's demand for agricultural imports. However, not all commodities will be affected equally by currency appreciation, and the potential effects on China's agricultural and food economy are complex.
This report examines how the undervalued yuan affects China's competitive performance in domestic and international markets for agricultural commodities and food products. The report compares Chinese and U.S. prices for various foods and agricultural products to provide perspective on the price-competitiveness of U.S. agricultural products in China and allow informed assessments of how currency appreciation may affect that competitiveness.