Chinese Currency: To Appreciate or Not to Appreciate-That's the Question

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ABSTRACT

This paper discusses the pros and cons of appreciating the Chinese currency. The Governmental stances and views of economists and businessmen both for and against the RMB appreciation are discussed, followed by the analysis of the fundamental motives of American and Japanese government and industrialists for pressing China to revaluate RMB. This is followed by a brief discussion and analysis of what should be done about RMB's value. This paper concludes that it is not in the interest of China to appreciate RMB at the moment or in the near future. Before China succeeds in systematic structural reforms and its economy gets strong enough to withstand risks of RMB appreciation, it should and will maintain the current RMB-dollar exchange rate.

INTRODUCTION

Over the past few months there has been heated discussion about the issue of China's currency revaluation. There are generally two positions in this currency dispute. American politicians, scholars, and business people, particularly those in manufacturing industry are accusing China of deliberately and severely undervaluing its currency. They blame the low value of the Chinese RMB for US j ob losses, trade deficits, and other economic problems, and are pressing the Chinese government to abandon artificial manipulation of foreign exchange rate system and allow RMB to appreciate. If it remains unchanged, the American government has threatened to inflict trade sanctions against a series of products imported from China, e.g. TV sets, textile products, furniture, etc in order to force China to raise the value of RMB. It has sought allies from other governments through G-7 meeting and held other high-ranking bilateral talks. Japan is responding most actively to America's call for the revaluation of RMB. In September 2003, US Treasury secretary John Snow visited China specifically to discuss the Chinese currency issues.

The US governmental efforts to press China to appreciate RMB seem to be futile. However, Chinese politicians, economists, and business people are taking the opposite view. Chinese central governmental officials have reiterated that China would not appreciate RMB in the near future. During Chinese Premier Wen Jiabao 's visit to Washington in late November 2003, he again stressed the need for Chinese currency to maintain its stability. The Chinese currency revaluation issue has sparked international controversy. To appreciate or not to appreciate, that's a big problem.

This research paper will proceed as follows: To begin with, a literature review of the key relevant articles will be conducted. Next, the governmental stances and views of economists and businessmen concerning the RMB's revaluation issue will be discussed. Subsequently the fundamental motives behind the US and Japan's aggressive action to call for RMB appreciation will be explored. This will lead to a brief discussion and analysis of what should be done about RMB's value and finally followed by a summary and conclusion.

LITERATURE REVIEW

During the recent years, economists worldwide have done extensive research on the RMB revaluation issue. Xu (2000) examines in detail the fundamentals that determine the exchange rate in China and concludes two important findings. Firstly, the past two decades of economic reform has made the domestic prices in China sufficiently market-determined and linked to the world prices so that the exchange rate stability leads to domestic price stability. secondly, due to the flexibility of domestic prices, a change in the exchange rate has only a modest and ephemeral effect on the terms of trade and trade flows. Therefore, the exchange rate flexibility is not essential to keep the current account in balance. Such evidence suggests that China should continue its exchange rate policy which has been carried out since 1994 to maintain stability.

An article in International Economy (2003) presents the views of thirty two economists on the impact of the Chinese currency on the global economy. …