China’s Undervalued Currency Jonathan Piekutowski

The Current Account For the past ten years China has been developing a huge current account surplus (approximately $239 bil. Or 9.1% of GDP in 2006) This was accomplished by fixing their renminbi currency at approx 8.28 per dollar.

Deregulation Due to trade sanction threats from the US, China revalued the currency in July of 2005 by 2.1% and allowed it to appreciate at a slow rate as well as created a narrow band for it to fluctuate within. Since the deregulation to January 2008, it has appreciated approximately 13%. The slow appreciation is due to the Chinese government fearing the loss of their exportation ability.

Silver Lining Economists, believe that although China opposes the revaluation it would be good for their economy. This is because inflation was going up due to not only the current account and trade surplus, but because of cash inflow of speculators believing that the currency will continue to appreciate because of the threat of trade sanctions forcing China to revalue the currency.

Silver Lining cont. Absorption (A) is a measure of a country’s demand for goods and services from anywhere in the world A= C + I + G A revaluation of the currency would shift demand from home to foreign goods, which would battle inflation, and the huge trade imbalance, but unemployment would rise

Absorption and Currency An increase of absorption would also help the lower the trade imbalance and would keep unemployment under control due to the increase in consumption. Because of the revaluation of currency Chinese are more willing to demand foreign goods and less willing to demand domestic because they cost more. At the same time, inflation is reduced naturally because the currency is being forced up in value.

Cont. It is also proposed that China increase it’s government and private spending. Currently China saves 45% of it’s GNP every year. Increased spending would only help consumption and help balance the economy and the currency.