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HONG KONG (CNNMoney) -- Monetary policy is a hot topic this
election season. But forget the Federal Reserve -- it's China's currency
that is drawing the attention of Mitt Romney.
The Republican presidential candidate has pledged to label China a
currency manipulator on his first day in office. And if China does not
move quickly to float its currency, the yuan, Romney would slap duties
on Chinese imports.
"One of the ways they don't play by the rules is artificially
holding down the value of their currency," Romney said last week. "China
has been a currency manipulator for years and years and years."
China is on the agenda for Monday's final presidential debate.
Odds are, Romney will again repeat his pledge and slam the Obama
administration for its decision to delay a report on exchange rates that could have been used to denounce China's currency manipulation.
President Obama can, in turn, point to a 10% increase in the value
of the yuan since 2010 and claim administration pressure on Beijing is
already working.
So what's all the fuss about?
China has long been accused of keeping the yuan artificially low
by hoarding foreign reserves. That, in turn, gives Chinese exporters an
advantage over competitors.
It works like this: In an effort to control the exchange rate,
China sells its own currency, while making large purchases of foreign
currencies, often the U.S. dollar.
Related: Candidates talk tough on China
The manipulation distorts capital flows, and has the potential to
impact labor markets and trade. Currency market intervention of this
type is a violation of International Monetary Fund rules -- but they are
seldom enforced.
Manipulation creates advantages for China. By keeping the yuan's
value low compared to the dollar, China's goods are much more attractive
to American consumers. At the same time, products manufactured in the
U.S. are more expensive for buyers in China.
Having a leg up on the international competition has allowed China's export-driven economy to expand at staggering speed.