Impact of Yuan Appreciation

Topics: Foreign exchange market, Monetary policy, Bretton Woods system Pages: 14 (5194 words) Published: August 22, 2010
The Economic Impact of the Chinese Yuan Revaluation
Xiaohe Zhang School of Economics, Politics and Tourism Faculty of Business and Law The University of Newcastle. Callaghan, NSW 2308, Australia Telephone: 612-49215034 Fax: 612-49216919 Email: James.Zhang.@newcastle.edu.au Abstract Since the beginning of the economic reform process in 1979, the Chinese currency (yuan) was devalued on many occasions until 1994 when the two-tier foreign exchange system was ended. While the official rate of yuan had been maintained constant over seven years since 1998, the pressure on the revaluation of yuan intensified. After years of speculation and hearsay, China finally revalued the RMB by 2.1% in July 2005. There are arguments currently on how and to what extent the official rate of the yuan should be further revalued. However, due to a de facto real appreciation of the yuan relative to its neighbor countries since 1994, the competitiveness of China’s exports has been reduced. It would be therefore very difficult for the Chinese authorities to allow the yuan to revalue considerably in the near future. This paper attempts to offer a quantitative evaluation of several policy scenarios in reference to the yuan revaluation through simulating a multi-country macroeconometric model (the Fair Model). According to the results of the simulations, the revaluation of RMB would not be appealing to the Chinese. To some extent it would further reinforce the deflation, reduce the competitiveness of China’s exports and the growth of GDP. As a result, some additional policies may need to be implemented to remove the adverse impact of the yuan revaluation.

Paper prepared for the 18th Annual Conference of the Association for Chinese Economic Studies Australia, “China: Internal Challenges and Global Implication in the New Era: Strategies for Sustainable Economic Growth and Business Responses to Regional Demands and Global Opportunities.” Melbourne, Australia 13-14 July 2006. I am very grateful for the valuable comments by Professor Martin Watts, the School of Economics, Politics and Tourism, The University of Newcastle.

The Economic Impact of the Chinese Yuan Revaluation
1. Introduction Since the economic reform started in 1979, the Chinese currency (yuan) had been devalued several times until 1994 when the two-tier foreign exchange system was ended. While the official rate of yuan had been maintained constant over seven years since 1998, the pressure on the revaluation of yuan intensified. It has been perceived by some economists that the yuan is undervalued on an order of 15 to 35% (Frankel 2006, Zhang and Pan, 2004, Chang and Shao, 2004, Goldstein and Lardy, 2003, among others). After years of speculation and hearsay, China finally revalued the yuan by 2.1% in July 2005. While the currency remains effectively pegged to a basket of hard currencies, it is allowed to fluctuate against the US dollar (USD) by less than 0.3 per day in either direction. However, the issues on whether, when and to what extent the official rate of the yuan should be further revalued remain unsolved. Some American politicians, as the representatives of the manufacturers and labour unions, believe that the undervalued yuan is responsible for much of the U.S trade deficit (it reaches $800b in which about one fourth of it is with China), while other commentators, such as Tung and Baker (2004), and Frankel (2006) argue that further revaluation of the yuan serves China’s own interest so a considerable revaluation is deadly needed. Though the decision over yuan revaluation becomes more political when some “external” pressures from the USA, Japan and Europe intensified over the last two years, the Chinese authorities, nevertheless, are still reluctant to revalue the yuan further. They insist that China’s banking system and financial institutions must be improved before floating the yuan is considered. This may also be due to a fear of losing further competitiveness in China’s...

References: Brahm, Laurence and Li Daoran, 1996, “Chapter 15: Foreign Exchange”, The Business Guide to China:123-131 Chang, G. Hsin and Shao, Qin 2004. “How much is the Chinese currency undervalued? A quantitative estimation”. China Economic Review, Vol. 15, No.3, page 366-71.. Fair Ray C. 1999, What Can Macroeconometric Models Say About Asia-Type Crisis? Fair Ray C. 2004, Estimating How The Macroeconomy Works, available in http://fairmodel.econ.yale.edu Frankel Jeffrey, 2006 “On the Yuan: The Choice Between Adjustment Under a Fixed Exchange Rate and Adjustment under a Flexible Rate,” published with abstract, in Understanding the Chinese Economy, edited by Gerhard Illing (CESifo Economic Studies, Munich), 2006. Proof . Giles, Jone, Albert Park and Juwei Zhang, 2005. “What is China’s true unemployment rate?”, China Economic Review, Vol. 16, No.2, page 149-70. Golsarwin, M. and Lardy, N. 2003. “Two stage currency reform for China”, Asian
Wall Street Journal, September 12. China Economic Review, Vol. 15, No.3, page 343-7. Guerineau, Samuel, and Sylviane Guiliamont Jeanneney 2005. “Deflation in China”, China Economic Review, Vol. 16, page 336-363.. Lardy, Nicholas, R. 1992. Foreign Trade and Economic Reform in China, 1978-1990. Cambridge University Press. Lu, Ding, 2004. “China’s capability to control its exchange rates”, China Economic Review, Vol. 15, page 343-347.. NBF Economic Research, 2003. Weekly Economic Letter, February 21, 2003 Roberts, Ivan and Rod Tyers (2001), “China’s Exchange Rate Policy: The Case For Greater Flexibility”, Working Papers in Economics and Economietrics No. 389, Australian National University, January 2001. Joseph Stiglitz, July 2005, “Stiglitz on China and Why U.S. Economic Advice is Discounted”. Economists view, http://economistsview.typepad.com/economistsview/2005/07/stiglitz_on_chi.html Sun, Huayu and Yue Ma, 2005. “Policy strategies to deal with revaluation pressures on the RMB”, China Economic Review, Vol. 16, page 103-17.. Tung Chen-yuan and Sam Baker, 2004. “RMB revaluation will serve China’s self-interest”. China Economic Review, Vol. 15, No.3, page 331-5. Zhang Fan and Zuohong Pan, 2004. “Determination of China’s long-run nominal exchange rate and official intervention”, China Economic Review, Vol. 15, No.3, page 360-5.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Impacts of Rupee Appreciation/Depreciation on Import Essay
  • Chinese Yuan Essay
  • REASON AND IMPACT OF INCREASE IN CHINESE YUAN VALUE OF CHINA Essay
  • Revaluation of Chinese Yuan Essay
  • Rmb Appreciation Positive Impact on China’s Economy and the Follow-Up Measures Essay
  • An Evaluation of the Impact of Rmb Appreciation on the Chinese Agricultural Trade Essay
  • Essay on impacts
  • concert report MUSIC APPRECIATION Essay

Become a StudyMode Member

Sign Up - It's Free