
Renminbi currency value is a debate affecting the
Chinese currency unit, the ''
renminbi'' (
Code:CNY). The ''renminbi'' is classified as a
fixed exchange rate
A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another ...
currency "with reference to a
basket of currencies",
which has drawn attention from nations which have freely
floated currency and has become a source of trade friction with
Western nations
The Western world, also known as the West, primarily refers to the various nations and states in the regions of Europe, North America, and Oceania. .
Background
The ''renminbi'' was introduced in October 1949 after the Communists took power on the Chinese mainland and established the
People's Republic of China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's List of countries and dependencies by population, most populous country, with a Population of China, population exceeding 1.4 billion, sli ...
.
Since the
Chinese economic reform
The Chinese economic reform or reform and opening-up (), known in the West as the opening of China, is the program of economic reforms termed "Socialism with Chinese characteristics" and " socialist market economy" in the People's Republic of C ...
s of 1978, China has become the world's biggest exporter, second largest economy and biggest manufacturer in the world.
For most of its early history, the ''renminbi'' was
pegged to the U.S. dollar at ¥2.46 per USD (note: during the 1970s it was revalued until it reached ¥1.50 per USD in 1980).
Its value gradually declined as China embarked on a new economic course during
Deng Xiaoping
Deng Xiaoping (22 August 1904 – 19 February 1997) was a Chinese revolutionary leader, military commander and statesman who served as the paramount leader of the China, People's Republic of China (PRC) from December 1978 to November 1989. Aft ...
's leadership and transformed into a more market-based capitalistic economy.
Since 2005, the Chinese government has overturned its previous policy of pegging the Renminbi to the US dollar. The ''renminbi'' now floats within a small margin compared to a basket of currencies selected by the Chinese government.
This is seen as a move to a more fully free-market floating of the Renminbi. The Renminbi has appreciated 22 percent since the mechanism reform in 2005 of the Yuan exchange rate.
However, during the onset of the
2007-2008 global financial crisis, the ''renminbi'' was unofficially repegged to the US dollar. It was again depegged from the dollar in June 2010.
After 2010, the exchange rate floated in line with fundamentals,
staying mostly between 6 and 7 CNY per USD. In 2018, the renminbi lost value as China's exports were targeted by USA tariffs and markets had doubts about the strength of the economy. Such a depreciation is typical of a country whose exports are at risk, as shown by
the drop of the pound after Brexit,
[ and in July 2019 the ]IMF
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
found the yuan to be correctly valued, while the dollar was overvalued. In August 2019, the central bank of China ( PBOC) let the renminbi fall over 2% in three days to the lowest point since 2008 as it was hit by strong sales after threats of further USA tariffs.[
]
International consequences
Prominent economists including World Trade Organization
The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade. With effective cooperation
in the United Nations System, governments use the organization to establish, revise, and ...
(WTO) Director-General Pascal Lamy
Pascal Lamy (born 8 April 1947) is a French political consultant and businessman. He was the Director-General of the World Trade Organization (WTO) from 1 September 2005 to 1 September 2013 for 8 years. In April 2009, WTO members reappointed Lam ...
, U.S. Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
Chairman Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Dur ...
, Nobel Laureate Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was t ...
, Director of the Peterson Institute for International Economics Fred Bergsten
C. Fred Bergsten (born April 23, 1941) is an American economist, author, think tank entrepreneur, and policy adviser. He has served as assistant for international economic affairs to Henry Kissinger within the National Security Council and as ...
, and Cornell University
Cornell University is a private statutory land-grant research university based in Ithaca, New York. It is a member of the Ivy League. Founded in 1865 by Ezra Cornell and Andrew Dickson White, Cornell was founded with the intention to ...
Professor Eswar Prasad
Eswar Shanker Prasad (born 1965) is an Indian-American economist. He is the Tolani Senior Professor of International Trade Policy at Cornell University and a senior fellow at the Brookings Institution, where he holds the New Century Chair in Econ ...
have repeatedly stated that China's currency is undervalued.
Peterson Institute of International Economics study said in 2010 that the yuan was 20 percent undervalued versus the dollar.
An undervalued currency causes serious problems and international criticism.
#As a member of the WTO and IMF, China's undervalued ''renminbi'' would violate Article XV(4) of the General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its ...
Article 1, and 3 of the WTO Agreement on Subsidies and Countervailing Measures, and Article IV Section 1 of the IMF that prohibiting countries from currency manipulation. However, the USA Treasury in 2018 cleared China from the accusation of currency manipulation.
#The trade dispute with the U.S. would be worsened by an undervalued ''renminbi''.
#An undervalued ''renminbi'' could cause inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
. In an effort to hold the value of the yuan comparatively low, the government has to buy foreign currencies through trade surpluses and investment. China's foreign reserves, already the world's biggest, soared to $2.8 trillion at the end of 2010. In order to buy foreign currencies, the government has to print the RMB “at a furious pace” and therefore incur inflation. However, between 2012 and 2019, China's inflation has been reported to be persistently low, around 2%.
# An undervalued ''renminbi'' would contribute to very large portfolio foreign capital inflows, motivated by expectations of quick appreciation, adding pressure for the currency to rise.
# An undervalued ''renminbi'' would undermine domestic consumers’ purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
when it comes to goods from outside the country. An undervalued currency makes foreign goods more expensive in terms of yuan.
Chinese domestic discourse
Chinese economic reforms in the late 1970s propelled the Chinese economy from a closed centrally planned economy
A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, p ...
to one opened to foreign investments and capital, oriented to manufacturing of electrical goods, textile, toys and exports. has allowed China to become a creditor country in relations to current accounts and the largest in terms of foreign reserves.
China maintains that the value of the ''renminbi'' is market-driven. China says that its population receives high savings from the structure of the economy, and that gradual increase in domestic consumption is important for its own growth. While the Chinese have argued that their exchange rate is purely a domestic policy matter, economists have begun to suggest that Chinese policy will soon shift to accelerate appreciation of the Yuan in order to reduce domestic inflation and to increase the wealth of Chinese citizens.
Others in China view this dispute as an attempt to ring in China's economic development as part of a strategy for economic imperialism of the industrialized world led by the United States. They likened it to the unequal treaties
Unequal treaty is the name given by the Chinese to a series of treaties signed during the 19th and early 20th centuries, between China (mostly referring to the Qing dynasty) and various Western powers (specifically the British Empire, France, the ...
signed after the Boxer Rebellion
The Boxer Rebellion, also known as the Boxer Uprising, the Boxer Insurrection, or the Yihetuan Movement, was an anti-foreign, anti-colonial, and anti-Christian uprising in China between 1899 and 1901, towards the end of the Qing dynasty, b ...
and the First
First or 1st is the ordinal form of the number one (#1).
First or 1st may also refer to:
*World record, specifically the first instance of a particular achievement
Arts and media Music
* 1$T, American rapper, singer-songwriter, DJ, and reco ...
and Second Opium Wars.
References
{{DEFAULTSORT:Renminbi currency value
Economy of China
Foreign exchange market
Currency value