China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?

John Tatom

No 2007-WP-24, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: China-bashing has become a popular media and political sport. This is largely due to the U.S. trade imbalance and the belief, by some, that China is responsible for it because it manipulates its currency to hold down the dollar prices of its goods, unfairly creating a trade advantage that has contributed to the loss of U.S. businesses and jobs. This paper reviews the problem of the large trade imbalance that the United States has with China and its relationship to Chinese exchange rate policy. It examines the link between a Chinese renminbi appreciation and the trade balance and also whether a generalized dollar decline could solve the global or Chinese U.S. trade imbalance. The consensus view explained here is that a renminbi appreciation is not likely to fix either the trade imbalance with China or overall. Though these perceived benefits of a managed float are small or non-existent, perhaps they should be pursued anyway because of small costs or even benefits for China. Section IV looks at the costs of a managed float in terms of the benefits of the earlier peg. Opponents of a fixed dollar/yuan exchange rate ignore the costs of a managed float for China, especially with limits on currency convertibility. These costs are outlined here in order to provide an economic basis for the earlier fixed rate and China’s reluctance to appreciate. Finally it is suggested that the necessary convertibility on capital account, toward which China is moving, could easily result in yuan depreciation under a floating rate regime. This is hardly the end that China critics have in mind and it is not one that would improve U.S. or other trade imbalances with China.

Keywords: exchange rate policy; China; currency manipulation; current account imbalance (search for similar items in EconPapers)
Pages: 13 pages
Date: 2007-10
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable? (2007)
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