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Essay on China’s Renminbi: “Our Currency, Your Problem”

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China’s Renminbi: “Our Currency, Your Problem”

Our Currency, Your Problem is a case involving the issue of exchange rate regimes and the impact currency manipulation has on economies and trade. The United States and Europe argued that the Renminbi (RMB) was undervalued and claimed that the People’s Bank of China (PBoC) deliberately manipulated the exchange rate to lower the prices of exports, which caused the US and Europe to run huge trade deficits with China.
The US and Europe felt that the RMB was undervalued for several reasons. One reason is that China’s exports had dramatically increased, growing 30% from 2004 to 2005, making China the third largest exporter in the world and accounting for…show more content…
A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.
In 1994 the Chinese government made the decision to peg the RMB to the US dollar at a rate of US$1 to RMB8.7, a year later the Renminbi appreciated 5% and was revalued to RMB8.28. This rate would remain unchanged for the next 10 years, even though the Chinese faced heavy scrutiny and pressure to revalue their currency. The Chinese exercised many policies in maintaining their exchange rate. The PBoC controlled the amount of foreign currency by forcing all exporters to immediately sell their foreign currency to designated banks. The RMB could only be traded on the China Foreign Exchange Rate
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