Is China's Exchange Rate Undervalued?
Recently China has come under increasing pressure to revalue its currency, the Renmbini (RMB) from US policy makers. Indeed, in July 2005 China succumbed to the pressure with a revaluation of roughly two percent. This quieted the objections for a few months; however US politicians are again applying pressure on China to further revalue the RMB. Concern relating to the ballooning US current account deficit is the major motivation for the political posturing. The US 's current account balance is, as of 2005, in deficit by more than $800 billion . Compare that with China 's situation of a positive $129 billion current account position for the same period and you can see why there is concern over the issue.
US politicians point to the rapidly accumulating foreign reserves held by China, now amounting to over $850 million, as evidence of currency manipulation. (The Times, 28Mar06). They make the case that maintaining the artificially low position of the RMB through foreign reserve accumulation deteriorates the US current account balance with China because it reduces the competitiveness of US industries with respect to price. Thus, they argue that an appreciation of the RMB would help to level the playing field for US companies and increase output which would, in turn, decrease the imbalance in the current account.
China on the other hand is hesitant to revalue. China has been going through an amazing bout of growth over the last couple of decades which they are cautious to undermine. Since 1978 China has averaged over 8 percent growth annually (Shane and Gale, p-02). In achieving this growth, China has gone through a series of structural changes with respect to the governing of their economy, most notably a transition from a centrally planned economic allocation of resources to a more socialized market influenced system of governance. While this transition has provided the impetus for their growth, their transition is far from complete and is beset
US politicians point to the rapidly accumulating foreign reserves held by China, now amounting to over $850 million, as evidence of currency manipulation. (The Times, 28Mar06). They make the case that maintaining the artificially low position of the RMB through foreign reserve accumulation deteriorates the US current account balance with China because it reduces the competitiveness of US industries with respect to price. Thus, they argue that an appreciation of the RMB would help to level the playing field for US companies and increase output which would, in turn, decrease the imbalance in the current account.
China on the other hand is hesitant to revalue. China has been going through an amazing bout of growth over the last couple of decades which they are cautious to undermine. Since 1978 China has averaged over 8 percent growth annually (Shane and Gale, p-02). In achieving this growth, China has gone through a series of structural changes with respect to the governing of their economy, most notably a transition from a centrally planned economic allocation of resources to a more socialized market influenced system of governance. While this transition has provided the impetus for their growth, their transition is far from complete and is beset
References: Duncan and MaCartney, "Chinese Foreign Reserves to Exceed $1 Trillion" The Times, March 29, 2006, Guijun L. and Schramm R. "China 's Progression toward Currency Convertibility," The Chinese Economy, V37: (2004), 78-100. Lu D. "China 's Capability to Control its Exchange Rate," in China Economic Review, V15: (2004), 343-347. Ping L. "Challenges for China 's Banking Sector and Policy Responses," China Banking Regulatory Commission, November 14-16, 2003 Renminbi," China Economic Review, V16, (2005): 103–117. Tung C. and Baker S. "RMB Revaluation will Serve China 's Self Interest," in China Economic Review, V15, (2004): 331-335