international trade-china-us exchange rate dispute
Post on 07-Aug-2015
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US-China exchange rate disputePresented by Xintong Hou
Background
2005:Chinese governmentannounced to change its official exchange rateregime
2005-2006:The RMB initially continuedto maintain a tight peg to thedollar after July 2005; In 2006,the relationship gradually loosened
January-March 2007:PBOC began to assign a little weight within the anchor basket to a few non-dollar currencies
2007-May, 2008The anchoring basket beganto assign substantial weightto Euro; To May 2008, theanchor was a true basket that put virtually as much weight on the euro as onthe dollar
Sep. 2008-Feb.2009:All the weight once again was given tothe dollar.
January 2009: US Treasury SectaryGeithner’s confirmationhearings to the Congress
Some changes RMB has risen up 12 percent between June
2010 and February 2012 on an inflation-adjusted basis and at least 25% (25 to 40 percent based on different measures) since 2005 .
In the last two years, American export to China has risen sharply.
The trade surplus of China has more than halved from a 2008 peak of $300 billion to an estimated $125 billion in 2012.
China has gradually liberalized cross-border capital flows since 2009. e.g. RTSS
Some thoughts
China does run surpluses with both the US and Europe. However, China also runs deficits with Japan, South Korea and the ASEAN countries. So the renminbi may be just about right in global terms
Stop buying or keep buying dollar?
• Despite RMB has appreciated at least 25% since 2005, China’s currency revaluation has not brought back lost manufacturing
jobs to the U.S., nor has U.S. trade deficit with China diminished appreciably• China/US trade balance has remained virtually unchanged
Source: United States Census of Bureau
Policy options
1) Keep bashing on China, pushing it to adopt the one-off or faster appreciation advocated by many U.S. politicians and congressmen2) Let China gradually reform its exchange rate regime, including allowing more flexibility for RMB and setting its value with reference to a basket of foreign currencies
Bashing on China: pros
Some U.S. producers of a product that is in demand in China will normally sell more in China if the RMB appreciates against the dollar.
U.S. producer of goods for domestic consumption competing against Chinese imports will also normally sell more if the RMB appreciates.
Other Asian countries competing with China will benefit from the appreciation of RMB
A small proportion of jobs may go back to U.S.
More open Chinese capital market
Bashing on China: cons
Trigger trade war at the middle of the Great Recession
Affect U.S. producers who use intermediate goods imported from China in their U.S. production processes and U.S. consumers.
May Lead to hard landing of Chinese economy, which will not be a bless for U.S. and the world economy as well
A dollar hard landing as the combination of a big fall in its value together with a big increase in US interest rates
Affect US-China cooperation on other issues, such as the nuclear problem of Iran and North Korea
Postponing US’s structural reform that would restore competitiveness
RecommendationLetting China gradually reform its
exchange rate regime
1) US should not push RMB too hard
An appreciation of RMB alone, would not do much to boost US export or employment.
US actually depend on China to continue buying dollars to finance its deficits.
Overheating is no longer the problem for the Chinese economy that it was as recently as a year ago ; and the exchange rate is no longer as seriously undervalued as it was
The stability of Chinese economy is in the World’s interests
RecommendationLetting China gradually reform its
exchange rate regime
2) It’s in China’s own interests, for several reason to reform its exchange rate regime
Force China to speed up industrial upgrading and structural transformation of Chinese economy
Neutralize imported inflation
Defuse political tension with the U.S.
An inevitable step for RMB to become a global reserve currency
• 70,000 Chinese trade companies are now permitted to settle trades in Chinese Yuan. In addition, PBOC announced at the beginning of 2011 that US customers will be able to open up Yuan-denominated accounts, and the World Bank became the latest foreign entity to issue an RMB-denominated “Dim-Sum Bond.”
• China is also promoting the use of RMB in China-Asia Free Trade Area (CAFTA)
• China Quietly Relaxes Controls on Foreign Capital
Sample Questions
How much has RMB appreciated since 2005?
T/F On April 15th 2009, the US Treasury semi-annual report did not label China as currency manipulator
Any Question?
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