Why China wants RMB currency undervalued Essay Example | Topics and Well Written Essays - 2750 words

Why China wants RMB currency undervalued - Essay Example China has adopted a policy of intervention to control the appreciation of its currency, the renminbi (RMB), against the dollar and other currencies. This policy measure is heavily criticized by most of its trading partners, especially the United States (Morrison and Marc 1).China's policy of pegging its currency against the U.S. dollar has resulted in severe devaluation of RMB. This undervaluation gives RMB an unfair advantage over competitors in exports. Critics argue that this policy has resulted in China's huge current account surplus, and global trading imbalance (Chen and Mai 4).Some analysts argue that China makes a deliberate effort to manipulate its currency in order to get an unfair trade advantage over other trading partners (Morrison and Marc 1).U.S. claims that RMB's undervaluation is leading to U.S. manufacturing job loss and trade deficit. On the other hand, China strongly condemns such allegations and asserts that international pressure is a form of protectionism and i nterference in China's domestic economic policy. This research paper explores the reasons behind Chinese currency's undervaluation and implications of appreciating it. Renminbi (RMB) is the official name of Chinese currency, and it is divided in the Yuan units, RMB and Yuan are used interchangeably. China has been under extreme criticism and international political pressure to revalue its currency. The pressure is primarily led by the United States of America who asserts that competitive undervaluation of the Chinese RMB and other Asian currencies have significant influences on the U.S. economy (Bergsten). According to Cline and Williamson's estimate, RMB's 25-40 appreciation would lead to reduction of annual U.S. current account deficit by $100 billion to $150 billion. On the other hand, proponents believe that currency appreciation is the solution to China's own problems as it can work as a tool to curb high inflation, lower import price, and dampen the demand for exports(Goldstei n and Lardy 2006; Bergsten 2010; Tyers et al. 2008; Tung and Baker 2004 qtd. in Yang, Wei, and Simla 1). Nevertheless, there are widespread concerns about a major RMB appreciation. Within China, it is believed that a major currency appreciation would lead to slow economic growth and leave adverse employment influences on labor-intensive export sectors (Xu et al. 2011; Tang 2011; Lin 2011; Duan 2011 qtd. in Yang, Wei, and Simla 1). Background on China's Currency Policy Recent empirical studies reveal that undervalued currency leads to faster economic growth. It is because exports rate grow relatively faster than import rates. Therefore, the producing country generates more foreign exchange and enhances its production capacity (Abola qtd. in Joyce). When a country's currency is undervalued, exports grow more than imports because it will provide cheaper goods as compared to their competing trading countries (Joyce). In past, currency valuation has been used by countries who intend to p romote their exports, such as, Japan and South Korea, and now China (Diokno qtd. in Joyce). Until 1994, China practiced a dual exchange rate system. It included an official fixed exchange rate system used by government, and comparatively market-based exchange rate system used by exporters and importers in "swap markets". China restricted access to foreign exchange in order to limit imports which resulted in large black market for foreign exchange.There was significant difference in the two exchange rates. In 1993, official exchange rate with dollar was 5.77 Yuan while 8.70 Yuan in the swap markets. United States criticized China's dual exchange rat