What Role Does the Undervalued Chinese Currency Play in Trade
Name:Yuan Lei Student ID：S06267
Research paper supervisor:Dr.Seku Conde
Minzu University of China
2007-2008 Academic Year
Abstract: This paper discusses what role the revaluation of the Chinese currency plays in exports of China,which affects the growth of Chinese economy to great degree.Firstly,I want to introduce why does China decide to revalue the RMB and give concrete reasons about it.Next,I describe the debate on the decision that China revalue the RMB a little.Finally,I discuss the advantages and disadvantages that the revaluation of the RMB produce from different aspects,especially exports.
Key words: the revaluation of the RMB export
1. Introduction
It is one hot topic that whether the RMB should be revalued or not for a long time. The revaluation of the RMB is under complicated backgrounds including economical and political problems.First of all,Japan calls for China to revalue the RMB,then America also indicates that the RMB should be appreciated.Because the US dollar is going down, some European and East Asian countries that worries about competive impact generated by Chinese exported commodities have joined the rank demanding the revaluation of the the RMB.Even more it is partly invovled into general election in America.But the more the United States tries to politicize the question,the more impossible China accept its opinion.As a result, China is faced with rather greater pressure from the louder voice about driving the revaluation of the RMB.Although the pressure exsits,China ought to consider it as one chance that prompts the growth of economy and society.Only if the exchange rate is limited to some degree,floating a little,the appreciation of the RMB can bring people lots of benefits.So China finally decide to revalue the RMB a little.
2.Why does China decide to revalue the RMB
Firstly I want to introduce the meaning of RMB Revaluation and why this event is a controversial problem. China’s central bank state they set the exchange rate on a daily basis and This means they have essentially ended the dollar peg and will move according to circumstances.
But why does China do this? First, China are under the pressure from the politicians of America. So the little revaluation was one way of doing something meaningless that will get members of Congress off their backs. But, one maybe argue that they would have done it sooner if not for the pressure.China has to adopt some measures to deal with the pressure by the means of revaluing the RMB.Although caused most ly by troubles of economics,the pressures were partly from the questions on politics.A part of the members of Congress were not satisfied with the great deficit in the trade between China and America,so they request China to regulate the economical policies to deal better with the problems.
Secondly, China do this event because it will finally bring economic interests. Holding down the value of the RMB has required that the People’s Bank of China (PBC) purchase the excessive supply of dollars coming into China.[1] To do this, the bank has had to print the RMB more. That created the growth of excessive money supply, inflationary pressures, a property price bubble, and an overheated economy. The only proper way to relieve the inflationary pressure on the economy of China is to allow revalue the RMB to some degree.As a result,the revaluation of the RMB has one deep origination of economy.It can reduce the crisis that holding down the value of the RMB may produce for the Chinese economy.If China did not revalue the RMB,the overheated economy would have resulted in serious problems of economy and society.
Thirdly, China do it to shift the superiority of the economic growth away from exports to the domestic demand. That is to say, the revaluation of the RMB will make the commodities of import into China cheaper. This will effectively increase the purchasing power of China’s consumers, accordingly increasing the domestic demand. In addition, lower prices the commodities of import will create more competition for China’s domestic companies, forcing them to become more efficient and more competitive. That will be important as China plans to accelerate the privatization of state-run companies. Finally, the revaluation of the RMB could increase export prices, accordingly slowing the growth the commodities of export . In the long run, China will not rely so much on exports for the growth of the economy. After all, exports depend on the healthy development of the global economy, to some degree over which China has no control. China do this event according to properable considerations that the revaluation of the RMB prompt the development of domestic economy.
As a result,China ended the dollar peg and made a higher currency according to the circumstances,such as the pressure from American politicians, economic interests and shifting the preponderance of economic growth away toward domestic demand. Revaluation of RMB is a rather complicated problem including economical and political factors.
But,this event isn’t the same as we see.Chief Economist Stephen Roach pointed out that breaking the link of the RMB with the US dollar would cause damage to the supply chain necessary for the global new production model. It will result in serious negative influence on Japan, America and Europe who bring China the great pressures. The pressures that were produced by the industrial world that request China to change its monetary policy will actually not satisfy their desires, they will reduce the resuits of their own efforts. Stephen Roach really cannot figure out the reason for insisting on boosting the revaluation of the Renminbi despite to their disadvantage. He cannot but make such an assumption: Certain countries do not want to bear their own responsibilities. Wealthy industrialized countries have found China to be a scapegoat for their slowly recovering economies. [2]
3. The debate on the decision that revaluation of the RMB
The Japan, the US and Europe think the RMB is undervalued and call for it to revalue on the ground of the fellow evidences: First, China have accumulated hefty foreign exchange reverse, China’s total foreign currency reserves have been rising rapidly. Second, China’s export has been steadily and rapidly increasing. China’s favorable trade surplus reached 30.3 bn last year.
Japan, America and Europe think the low value of the RMB boosts the excess of the foreign currency reserves. As a result, they claim that their deficits in trade between China and other countries are caused by the low value of the RMB. For example, the US’s Chinese trade deficit increased from US$30 billion in 1994 to US$103 billion in 2002. China should account for 21 per cent of the US’s trade deficit; Unions in the US are becoming increasingly strident in their calls for measures to be taken against cheap Chinese imports. They say it’s a major contributor to the loss of 2.7 million US manufacturing jobs. [3]They think that if the RMB is floated to some degree, market forces will drive the currency upwards, accordingly decreasing the gap in trade.
China think that a massive foreign exchange reserve reflects the strength of China’s exports and its ability to attract foreign currency.
"China's exports are taking only about 4.3 per cent of the world trade, which means that China's position in the world trade scenario is still relatively modest. " said Long Yongtu, the former vice-minister of foreign trade and economic co-operation.
"China's change of currency will not change fundamentally the trade pattern of the world," said Long at a recent seminar held in Sydney.
And among China's export structure, 54 percent of its total exports were being traded by foreign investors in China, said Long, thanks to China's cheaper and high-quality labour resources, which has made the country part of the world's manufacturing and supply chain.
If China revalues its currency, it might become a little bit more difficult to export, and the commodities of import into China will become more expensive. That will also have a negative impact on the world's manufacturing chain, as China also imports a lot, said Long.[4]
China attracts a great amount of foreign direct investment. Official figures report that $500bn of foreign investment has arrived in the country over the past 20 years. Capital flows came into China in search of its low manufacturing cost and huge domestic market potential. According to S&P, Foreign direct investment in China has been much more important for the accumulation of China’s massive foreign exchange reserves than the trade surplus. China absorbed US$51 billion in contractual foreign investment during the first six months of the year, including US$30 billion in actual investment, up 40 percent and 34 percent, respectively, official statistics showed.[5]
The revaluation of the RMB may have some less expected effects on economic growth in the short term. Currently, China's export market still relies mostly on cheap labor to compete in the international market. As its added value is low, the appreciation of the RMB will affect China's export and consequently the overall growth rate of the national economy.
Revaluing the RMB will decreases China’s export and increases its import. In fact, China’s competitive prowess has little to do with currency. China competes mainly on the basis of labor costs, technology, infrastructure, human capital, and its passion and commitment to reforms.
“Revaluing the RMB will not weaken the superiority of export in [...]
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