China’s Renminbi: “Our Currency, Your Problem

1) Should China maintain the exchange rate of its currency? Why might it do so? Should it make the Yuan more expensive? Would a 20% revaluation of the Yuan impact people in China? In western countries? In Japan? In developing countries? If so, how? Remembering that China is now (2009) suffering reduced exports, should it, instead, depreciate the value of the Yuan?

Yes, China should maintain the exchange rate of its currency.

The United States is concerned because

 Renminbi is peg to U.S. dollar

 Renminbi is not allowed to float freely and China is manipulating the exchange rate to increase trade surplus (exports cheaper) and dollar reserves.

 Increase in trade deficit to US$233 billion in 2006

 China has large foreign reserves and had invested $1.2trillion in U.S. Treasury bonds.

However, Japan, Taiwan, South Korea were less vocal about the economic imbalances. These countries had production of high-value added components and then have the parts produced and assembled at much lower costs in China making their ultimate product cheaper and exports more competitive. The multi-national companies from these countries had China as production base and do not want sudden change in the value of renminbi as it will impact their position in the trade market (exports). Also, revaluation of Yuan will have a major effect on China’s economy. Revaluation will make products manufactured in China more expensive and less competitive in the international market. It was vital to maintain the growth of exports for the economic sustainability of the country. Furthermore, China had to find jobs for million of farmers leaving countryside for higher-paid jobs in cities.

Devaluing is also not a good alternative for China right now. Even though a cheaper Yuan could help Chinese exports in the short term, a big devaluation of the Yuan could also have devastating effects in the Asian region, affecting the “processing state” countries in Asia. Furthermore, it will compel...