Is China’s Currency Too Strong

Is China’s Currency Too Strong

Outcomes of Revaluation

• Factory closures and layoffs

• Disturbed social stability

• Severe domestic consequences

• Chinese exports would become more expensive to foreign buyers

• Marginal factories out of business and put their workers on the streets

• Companies would shift low-wage manufacturing to countries such as Vietnam and Sri Lanka

• Rise in poverty

• Anti-government feeling

• Any significant appreciation of the renminbi will erode China’s export competitiveness overnight and impact the livelihood of tens of millions of workers.

Why a revaluation would actually benefit China?

• A stronger yuan would help restrain inflationary pressures

• Increased purchasing power of Chinese businesses and consumers

• Attention to social needs, such as housing, environmental clean-up, and infrastructure

Gradual appreciation

• Steep revaluation of the RMB would have devastating effects

• Sudden jump of 20 percent or more would lead to reduced exports and unemployment in China

• The policy of a very gradual RMB appreciation of its currency seems a bit justified.

Should China Be Blamed?

The revaluation might not be quick enough to suit the Americans but the revaluation is happening nevertheless.

China does not let its currency float in the market.

The U.S has been shifting its labor intensive product to overseas primarily China in the last 20 years. China has a big labor pool and a good infrastructure.

The American workers have lost their jobs as a direct result of the American companies relocating and outsourcing to China

The China has built up its reserve not only by the currency manipulation but by severe hard work as well as smart work.

Americans borrow more and save less.

The Americans had started to rely heavily on emerging market labor leading to unemployment in their own country.

America has been over counting the Chinese exports

Low interest rates on long-term bonds,

Which Approach to Take?

• Not effective in case of

China

• Effective in case of

Korea and Taiwan

• Long procedure

• Uncertain outcome

Effective in past in case of

Japan and major countries

of Western Europe

• Treasury Secretary begins formal

negotiations

• Passing legislation if Treasury fails

• Basing legislation on GATT and WTO

charters

Conclusion