Assignment 2: Case Analysis (Chinas Renminbi: Our Currency, Your Problem)

1) Recap

the

different

arguments

used

by

the

U.S.

of

America

and

Chinese

governments about the renminbi.

US Government
1. Government

of

United

States

accused

the

undervaluation of Yen and threatened to block Japanese imports if

Yen were not revaluated.
2. US Officials continued to put extra pressure on the revaluation of
Yen even when Chinese currency was at 7.2% against dollar.
Chinese Government:
1. Officials from china said that US is pushing for the revaluation of
the currency because of its own trade and budget deficit.
2. Chinese officials said that they adopted the peg to for the
betterment of countrys own economic environment and for the
betterment of its own partners.
3. Chinese

government

clearly

said

that

currency

is

not

undervalued and changes in the currency values has no relation

between external pressures.
4. Government officials mentioned that as a sovereign country,
China can chose the exchange rate policy

3. Why

are

Japan,

the

newly

industrialized

economies

(NIEs)

and

developing Asian countries less vocal than the US on the valuation of

the renminbi?
Ans 2: Japan and other Newly industrialized economies (NIE) were less vocal
than US because they were strengthening there economics ties with China.
These countries produced the parts in their own countries and assembled the
complete product in china because of the availability of the cheap labor. Major

part of the export and import of these countries (including China) was by
Processing Trade. This type of trade was mutually beneficial for both the
countries.
4. Do you think the renminbi is undervalued against the US dollar? How
can China maintain the exchange rate of the renminbi?
Ans4: Yes the Renminbi has been undervalued because of the fact that
even though china has excess of trade surplus ($101.9 Billion) and FDI
inflow has been increasing (from $53.5 Billion in 2003 to $63 billion in
2006) over the years, its currency value has not appreciated.

It was

expected that value of Renmibi should have appreciated in the fixed

basket as the value of dollar and Euro depreciated during this period.
Main reasons for undervaluing the currency is the generation of
employment and also by appreciation of RMB the Chinese products will
become uncompetitive in the market.
China maintains the exchange rate of the renminbi by keeping the value
of its currency low so that exports can boost. Chinese government
believes that keeping a constant exchange rate keeps the growth rate
high and as china`s growth depends largely on its exports, stable

rate

decreases the uncertainty of exchange rate for foreign partners and

investors.
5. Why does the Chinese government want to keep its currency at an
artificially low level against the US dollar?
6. Exchanging

all of

Chinas

US

dollars

for renminbi

can

lead to

inflationary pressure. How does China avoid this risk?

7. Why, despite the huge US trade deficit, has the US dollar not fallen?
Do you think there is a risk of this happening?
8.

What would be the consequences of a revaluation for China, western

c ountries, Japan, NIEs and developing countries?