Impact of Yuan Appreciation

The Economic Impact of the Chinese Yuan Revaluation
Xiaohe Zhang School of Economics, Politics and Tourism Faculty of Business and Law The University of Newcastle. Callaghan, NSW 2308, Australia Telephone: [phone] Fax: [phone] Email: [e-mail] Abstract Since the beginning of the economic reform process in 1979, the Chinese currency (yuan) was devalued on many occasions until 1994 when the two-tier foreign exchange system was ended. While the official rate of yuan had been maintained constant over seven years since 1998, the pressure on the revaluation of yuan intensified. After years of speculation and hearsay, China finally revalued the RMB by 2.1% in July 2005. There are arguments currently on how and to what extent the official rate of the yuan should be further revalued. However, due to a de facto real appreciation of the yuan relative to its neighbor countries since 1994, the competitiveness of China’s exports has been reduced. It would be therefore very difficult for the Chinese authorities to allow the yuan to revalue considerably in the near future. This paper attempts to offer a quantitative evaluation of several policy scenarios in reference to the yuan revaluation through simulating a multi-country macroeconometric model (the Fair Model). According to the results of the simulations, the revaluation of RMB would not be appealing to the Chinese. To some extent it would further reinforce the deflation, reduce the competitiveness of China’s exports and the growth of GDP. As a result, some additional policies may need to be implemented to remove the adverse impact of the yuan revaluation.

Paper prepared for the 18th Annual Conference of the Association for Chinese Economic Studies Australia, “China: Internal Challenges and Global Implication in the New Era: Strategies for Sustainable Economic Growth and Business Responses to Regional Demands and Global Opportunities.” Melbourne, Australia 13-14 July 2006. I am very grateful for

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