Impact of Yuan Appreciation

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The Economic Impact of the Chinese Yuan Revaluation Xiaohe Zhang School of Economics, Politics and Tourism Faculty of Business and Law The University of Newcastle. Callaghan, NSW 2308, Australia Telephone: 612-49215034 Fax: 612-49216919 Email: Abstract Since the beginning of the economic reform process in 1979, the Chinese currency (yuan) was devalued on many occasions until 1994 when the two-tier foreign exchange system was ended. While the official rate of yuan had been maintained constant over seven years since 1998, the pressure on the revaluation of yuan intensified. After years of speculation and hearsay, China finally revalued the RMB by 2.1% in July 2005. There are arguments currently on how and to…show more content…
National sovereignty is another concern that the Chinese authorities have to consider, since conventionally they believe that the value of a country’s currency is an internal issue so it should not be intervened by external pressures. The Chinese official position nevertheless, is shared not only by most of the academics and business people in China, but also by some western scholars, including Robert Mundell and Joseph Stiglitz, two Nobel laureates in economics. Mundell maintains that “a big change of its exchange rate will cut down China's growth rate from 9% now to perhaps half of 9%," (People's Daily, Feb. 13, 2006). Other adverse economic impact will include decrease in corporate profitability, deflation in the agricultural sector, an increase in unemployment, and less foreign direct investment. Joseph Stiglitz (2005) also argues that the yuan revaluation will have little effect on the trade balance for the US and the global economy, since the gaps in reduced Chinese imports in the US could be easily filled by increased imports from other developing countries. Based on this background, this paper has two objectives. Firstly, it attempts to test the Mundell-Stiglitz Hypothesis, i.e., the economic impact of yuan revaluation on China and its major trade partners including the USA, Japan and Australia
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