China’s Renminbi: “Our Currency, Your Problem”
China’s Renminbi: “Our Currency, Your Problem”
Our Currency, Your Problem is a case involving the issue of exchange rate regimes and the impact currency manipulation has on economies and trade. The United States and Europe argued that the Renminbi (RMB) was undervalued and claimed that the People’s Bank of China (PBoC) deliberately manipulated the exchange rate to lower the prices of exports, which caused the US and Europe to run huge trade deficits with China.
The US and Europe felt that the RMB was undervalued for several reasons. One reason is that China’s exports had dramatically increased, growing 30% from 2004 to 2005, making China the third largest exporter in the world and accounting for 6.5% of the world’s export. Another argument was that China’s inflow of FDI had become the second largest in the world by 2004.
The Chinese argued that their currency was not undervalued, that the policy of the PBoC benefited the US by helping them finance its huge budget, that even though they ran trade surpluses with the West they ran deficits with Asian countries, and that a low currency rate benefited multinational companies investing in China.
Meanwhile, Japan and the newly industrialized economies (NIEs) including Taiwan and South Korea were less vocal than the US and Europe because they had become so economically linked with China. They had invested themselves in China, thus an undervalued RMB would maintain operating cost low. Additionally, Japan and the NIEs ran trade surpluses with China and received essentially most of the benefit of value added process trade with China.
When choosing an exchange rate regime, countries can operate between two primary exchange rate systems. The first is a fixed exchange rate where the currency is strongly fixed to another value or “pegged” within a particular band and the rate is adjusted from time to time to stay within the defined or pegged range. The second is a floating
Our Currency, Your Problem is a case involving the issue of exchange rate regimes and the impact currency manipulation has on economies and trade. The United States and Europe argued that the Renminbi (RMB) was undervalued and claimed that the People’s Bank of China (PBoC) deliberately manipulated the exchange rate to lower the prices of exports, which caused the US and Europe to run huge trade deficits with China.
The US and Europe felt that the RMB was undervalued for several reasons. One reason is that China’s exports had dramatically increased, growing 30% from 2004 to 2005, making China the third largest exporter in the world and accounting for 6.5% of the world’s export. Another argument was that China’s inflow of FDI had become the second largest in the world by 2004.
The Chinese argued that their currency was not undervalued, that the policy of the PBoC benefited the US by helping them finance its huge budget, that even though they ran trade surpluses with the West they ran deficits with Asian countries, and that a low currency rate benefited multinational companies investing in China.
Meanwhile, Japan and the newly industrialized economies (NIEs) including Taiwan and South Korea were less vocal than the US and Europe because they had become so economically linked with China. They had invested themselves in China, thus an undervalued RMB would maintain operating cost low. Additionally, Japan and the NIEs ran trade surpluses with China and received essentially most of the benefit of value added process trade with China.
When choosing an exchange rate regime, countries can operate between two primary exchange rate systems. The first is a fixed exchange rate where the currency is strongly fixed to another value or “pegged” within a particular band and the rate is adjusted from time to time to stay within the defined or pegged range. The second is a floating