Introduction
Mainland China's surging exports in the early twenty-first century, and growing importance in world trade, have been accompanied by unprecedented scrutiny of its exchange rate policy not only by academics but also by politicians and policymakers, especially those in the United States.
The controversy initially focused on China's maintenance of a constant pegged exchange rate with the US dollar. Although US policymakers had repeatedly urged China to maintain this pegged rate during the 1997-1998 Asian financial crisis, the exchange rate parity of 8.28 RMB/$US was subsequently seen as too cheap, making China's exports cheaper in US dollar terms and accounting for China's growing trade surpluses with the United States. Since China's movement away from a pegged exchange rate in July 2005, the debate has shifted to the question of whether the currency's rate of appreciation against the US dollar is sufficiently rapid. This chapter discusses the evolution of China's exchange rate policy and offers some historical perspective on the valuation of China's currency, the renminbi (which1 As quoted in People’s Daily Online, October 26, 2005c. [2] means “people’s currency,” in Chinese). Recent renminbi valuations do not seem to have been too out of line with levels recorded in the 1990s, nor has ongoing empirical analysis of the currency’s purchasing power yielded any consistent support for US charges of drastic renminbi undervaluation.
However, Chinese authorities are right to be concerned about growing flows of funds into the country, and the renminbi. Even if the currency is not artificially cheap, the accumulation of foreign funds remains an inevitable result of the nation’s trade surpluses - an inflow that, in China’s case, has been heavily augmented by its attraction as a destination for foreign direct investment (FDI).
Moreover, speculation regarding renminbi appreciation has been a factor encouraging “hot flows” of money into the currency by individuals and businesses seeking to profit from this appreciation. As described in Chapter 6, there is certainly historical precedent for worrying about the potential inflationary effects of such large-scale capital inflows. In the late 1940s, as the Nationalist regime faced defeat in the Chinese Civil War, capital flight from the mainland to Taiwan precipitated a massive monetary expansion and hyperinflationary spiral on the island. The situation was greatly exacerbated by the Nationalist government’s decision to peg Taiwan’s currency at an artificially low value against mainland China’s currency, however. Fears that such a mechanism could reemerge in today’s People’s Republic of China are mitigated by the fact that, in real terms, China’s currency, the renminbi, remained in-line with its own historical levels of the 1990s. Nevertheless, China’s own history certainly provides a vivid warning as to the potential consequences stemming from an excessively undervalued fixed exchange rate.
More on the topic Introduction:
- Introduction
- Introduction
- Introduction
- Introduction
- Theory and Practice
- Introduction
- III Timetable of important events and laws
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