China's Currency Valuation

In: Business and Management

Submitted By scootzinc
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RE: China’s Renminbi Valuation Discussion

The following memo provides a summary of the basic discussion of the valuation of China’s Renminbi, the tumultuous situation surrounding global discussion regarding its valuation, and what appreciation of the Renminbi might mean for the global economy. This analysis is based primarily upon the Fung & Wong article, “China’s Renminbi: ‘Our Currency, Your Problem’?”.

Valuation Controls Placed Upon the Renminbi
Over the past couple decades China has maintained a high level of economic growth rate of approximately 9% per year. Recently, many countries began questioning the valuation of China’s currency, the Renminbi, and China’s exchange rate policies. These other countries pointed to China’s emergence as the third largest exporter of goods and the accumulation of $1.2 trillion (US$) in foreign currency reserves. In its defense, China asserted that the Renminbi was not undervalued and that its exchange rate policies helped maintain a stable economic environment. It also stated that countries running large trade and budget deficits, specifically with China, like the US, were attempting to use China as a scapegoat rather than the weaknesses of their own economies.

Is the Renminbi Undervalued?
It appears to me that the Renminbi is likely undervalued. Pegging the currency primarily to the United States Dollar (USD), and eventually to a basket of currencies dominated by the USD, may have created stability in the Chinese and Asian economies both during the Asian crisis and in the current period. However, this peg has undoubtedly reduced the cost of Chinese exports, making them considerably more competitive in unprotected markets, such as in US markets. Chinese officials’ claims that revaluing the Renminbi will likely slow China’s economic growth, slowing the growth of exports by increasing export costs, are…...

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