Magazine article Economic Trends

China's Trade

Magazine article Economic Trends

China's Trade

Article excerpt

There have been many calls for China to stop pegging the yuan-dollar exchange rate in a narrow range around 8.28. Chinese officials have indicated that they will continue to maintain the exchange-rate peg, but will loosen it sometime in the future. Forward yuan-dollar exchange rates are consistent with this: The three-month forward rate recently climbed back close to the pegged rate, and the two-year forward rate is now pricing in a 6.5% decline in the renminbi relative to the dollar.

Why is China being urged to let its currency float? The renminbi is widely considered to be undervalued against the dollar, so that low-priced Chinese exports are hurting domestic manufacturers. Economists typically look at real exchange rates to assess trading advantages. Since the yuan-dollar exchange rate is pegged, real exchange rate changes between the U.S. and China are determined entirely by their differences in inflation. Since U.S. inflation has exceeded Chinese inflation by 2.7% on average since 1998. U.S. imports from China should he getting slightly less expensive relative to domestically produced goods.

Despite these minor changes in recent years, the value of this year's Chinese imports to the U.S. will be nearly twice as big as in 1998, with most of the increase coming from manufacturing. A recent study showed that China's manufacturing import penetration in the U.S.--the ratio of Chinese imports to the domestic manufacturing market--rose from 1.7% in 1997 to 2.7% in 2001. This import surge, apparently without any large change in the terms of trade between China and the U.S., is not surprising in view of some fundamental changes in the Chinese economy. Export-led industrialization, starting roughly with the rise of Deng Xiaoping in December 1978, has helped turn China into a major economic power. Since 1980, its total trade as a share of its GDP has more than tripled--to slightly over 50%. …

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