Academic journal article Contemporary Economic Policy

Effects of Chinese Currency Revaluation on World Fiber Markets

Academic journal article Contemporary Economic Policy

Effects of Chinese Currency Revaluation on World Fiber Markets

Article excerpt

With a view to establish and improve the socialist market economic
system in China, enable the market to fully play its role in resource
allocation as well as to put in place and further strengthen the managed
floating exchange rate regime based on market supply and demand, the
People's Bank of China, with authorization of the State Council, is
hereby making the following announcements regarding reforming the RMB
exchange rate regime:
  Starting from July 21, 2005, China will reform the exchange rate
regime by moving into a managed floating exchange rate regime based on
market supply and demand with reference to a basket of currencies. RMB
will no longer be pegged to the U.S. dollar and the RMB exchange rate
regime will be improved with greater flexibility.
--The People's Bank of China

I. INTRODUCTION

This article examines the effects of Chinese renminbi (RMB) revaluation on the world fiber market. (1) China is the largest cotton producer, consumer, and importer in the world. The U.S. Department of Agriculture (USDA) expects China to import more than 9 million bales in 2004/5, accounting for more than 30% of the world cotton trade. RMB revaluation is likely to make the price of imported cotton relatively cheaper in the Chinese market. On the other hand, China is also the world's leading exporter of textile products. At the end of 2004, China accounted for 20% of the global textile trade, with some analysts predicting that this could rise even higher after the trade restricting quotas of the Multi Fiber Agreement are lifted in 2005 (U.S.-China Economic and Security Review Commission [USCC] 2005). If RMB appreciation decreases China's textile exports and affects relative prices of imported fibers, this may significantly impact the world fiber market as well.

China's exchange rate policy has become a topic of considerable debate and subject to international disparagement in recent years. Although the RMB has been pegged to the U.S. dollar since 1994 at around 8.28 yuan, international criticism of the currency regime has occurred only recently. Critics have charged that by undervaluing its currency, China has gained an unfair price advantage in its exports to the United States and other countries. The United States, a strong proponent of the currency peg during the Asian financial crisis of 1997, has reversed its position in recent years because of concerns by U.S. companies and politicians of the growing trade deficit with China (Schumer and Graham 2005).

One complaint stems from increased job losses in the U.S. manufacturing sector and production outsourcing to other regions of the world, especially China. The contraction of the U.S. manufacturing sector coupled with a widening U.S.-China trade deficit has intensified this criticism, with groups such as the National Association of Manufacturers urging the U.S. government to persuade China to reform its currency regime. In recent testimony before the House Subcommittee on Domestic and International Monetary Policy, Trade, and Technology, Goldstein (2003) of the Institute for International Economics indicated that undervaluation of the RMB is on the order of 15% to 25%. Others such as Preeg (2003) and Kujawa (2005) argue that RMB is undervalued by as much as 40%, contributing to the widening trade deficit between the United States and China.

In response to growing international pressure, particularly from the United States and other large economies, China recently moved from a hard peg of 8.28 yuan per US$ to a managed float, allowing the value of the RMB to vary within limits. The initial implementation of this revaluation policy resulted in an appreciation of the yuan to 8.08 per US$, a 2.4% currency adjustment. Many economists expect the yuan to gain an additional 5% in value relative to the U.S. dollar in the near term (Hilsenrath and Kissel 2005; Isadore 2005).

The likelihood of further revaluations of the RMB, as well as the economic effects of China's more market-oriented monetary system, are unclear. …

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