China: A Nation Depreciating its Currency to Economic Prosperity
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Case Code: ECON033 Case Length: 14 Pages Period: 2000-2010 Pub Date: 2011 Teaching Note: Not Available |
Price: Rs.300 Organization : - Industry : - Countries : China Themes: Exchange Rate Management, Currency Valuation, Foreign Trade |
Abstract Case Intro 1 Excerpts
"A stronger yuan is "essential" for both the Chinese and world economies.... The Chinese yuan was substantially undervalued."
- International Monetary Fund, in 2010.
"Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies- because that's what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject".
-Paul Krugman, in 2010, on constant yuan devaluation by China
Introduction
With allegations pouring in from all quarters that China was consistently undervaluing its currency, the Renminbi (RMB or yuan), the issue occupied central stage in global economic debates in 2010. By the mid-2000s, according to Chang and Shao (2004), the yuan had been undervalued by as much as 22.5%. The International Monetary Fund (IMF) said the yuan had been undervalued by 5% to 27% as of July 2010. Experts opined that undervaluation of the Chinese currency was affecting other countries and leading to trade imbalances in many countries, specifically the US, with China.
For example, China had a trade surplus of US $ 198 billion with the rest of the world in 2009 and its exports to the US were more than four times its imports from that country. China, however, maintained that its currency was not substantially undervalued and that it was moving ahead with its currency reforms. The Chinese central bank, People's Bank of China (PBoC), stated, "China's central bank has decided to further promote the reform in the RMB (yuan) exchange rate mechanism, and strengthen the flexibility of the RMB exchange rate."
Analysts were divided in their opinion on the problems caused by the alleged undervaluing of the yuan to China's trade partners. Paul Krugman, a leading economist and Nobel laureate, argued that running this level of current account surplus had caused job losses in its trading partners. He said, "Unlike the dollar, the euro, or the yen, whose values fluctuate freely, China's currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses."...
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