662, Case 3
1. Do you think the Renminbi is overvalued against the US Dollar? 2. Why does the Chinese government want to keep its currency at an artificially low level against the US Dollar? What is the risk for China? For the US? 3. What would be the consequences of a 20% revaluation (increase in the value of the Renminbi) for China, western countries, Japan, and developing countries? How would it impact workers, exporters, and importers in China?
Various studies have suggested that the RMB is undervalued, with recent estimates ranging from 15-50 percent.
The greatest beneficiary from a gradual RMB revaluation, accompanied by measures to stimulate demand, will be China itself. Its growth is likely to be more balanced and resilient, and that will have a positive spillover on the rest of the world, including by reducing currency and trade tensions.
RMB revaluation causes a loss to consumers outside China since they will confront higher prices of goods imported from China. These losses have to be offset against those of producers who will gain competitiveness. Moreover, China’s trading partners are more likely to gain from RMB revaluation if it comes with measures that accelerate China’s domestic demand relative to its GDP. Indeed, without those measures, the effect of RMB revaluation on China’s current account surplus is likely to be marginal or even to widen it.
In the very long run, a revaluation of the RMB could help commodity-exporters to diversify into basic manufacturers. However, over the next few years, RMB revaluation is unlikely to affect these countries’ exports significantly because the prices of their commodity exports are determined in global markets (and denominated in dollars). However, the dollar prices of China’s exports to those countries are likely to rise, reflecting small profit margins in those sectors and the fact that China, as the biggest exporter of those goods, is the price-setter.
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