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How successful is chinas currency manipulation

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A set of slides discussing China's "currency manipulation," and e

A set of slides discussing China's "currency manipulation," and e


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  • 1. Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ How Successful is China’s Currency Manipulation? Post prepared October 15 , 2010 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.
  • 2. Is China a Currency Manipulator?
    • The US Treasury has repeatedly avoided naming China as a “currency manipulator.”
    • It is felt that if used officially, those words would be seen as a declaration of economic war
    • However, as the words are used in plain English, China is clearly a currency manipulator. China’s central bank, the People’s Bank of China (PBoC) intervenes regularly to influence the exchange rate of the Chinese yuan relative to the US dollar
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Headquarters of the People’s Bank of China Photo source: Yongxinge, http://commons.wikimedia.org/wiki/File:People%27s_Bank_of_China.jpg
  • 3. How does China manipulate its exchange rate?
    • The Chinese government controls its exchange rate by buying US dollars in exchange for yuan
    • Doing so drives down the yuan’s value on foreign exchange markets
    • To use the proper economic term, the yuan is said to depreciate when it becomes weaker, that is, when more yuan are required to buy one dollar
    • When the yuan becomes stronger (fewer yuan per dollar), it is said to appreciate
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Chinese currency c. 1955. The Chinese currency, popularly called the yuan, is known officially as the renminbi . The picture shown here is an old version of the renmenbi. It is technically illegal to provide an image of the current version. Photo source: http://commons.wikimedia.org/wiki/File:RMB2-5jao-A.gif
  • 4. Why does China manipulate its exchange rate?
    • The Chinese government is not fully transparent about its objectives
    • Most observers assume that China’s attempts to resist appreciation of the yuan reflect strong political influence of big export industries
    • Other things being equal, a weaker yuan means more exports, and more profits for Chinese exporters
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Currency exchange machine, Beijing international airport. Photo source: Zhanyanguange, http://commons.wikimedia.org/wiki/File:BJ_%E5%8C%97%E4%BA%AC%E9%A6%96%E9%83%BD%E5%9C%8B%E9%9A%9B%E6%A9%9F%E5%A0%B4_Beijing_Capital_International_Airport_BCIA_FX_Currency_Exchange_self-service_machine_Aug-2010.JPG
  • 5. Has China changed its currency policy?
    • From 2005 until mid-2008, China allowed its currency to appreciate gradually against the dollar
    • Then, during the height of the global crisis, China held the exchange rate almost exactly fixed
    • Since June 19, 2010, China has again allowed gradual appreciation of the yuan
    • From June 19 to September 15, the yuan had appreciated by about 2.5 percent
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Notice: Because the vertical axis shows the exchange rate in yuan per dollar, a movement down on this graph indicates an appreciation of the yuan (The purchasing power of the yuan getting stronger relative to dollar)
  • 6. Is China doing enough?
    • Many critics say that China’s recent policy change is not nearly enough
    • They complain that the yuan is undervalued by 20 to 40 percent, and that the 2.5% appreciation since June is too little, too late
    • However, if we look past the political rhetoric to the underlying economics, the relative competitiveness of Chinese exports appears to be changing much more rapidly than the headline numbers suggest
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ On a trip to China in October 2010, Sen. Max Baucus (D-MT) Pressed China’s Leaders on undervaluation of the yuan Photo :http://commons.wikimedia.org/wiki/File:Max_Baucus.jpg
  • 7. Watch the real exchange rate, not the nominal rate!
    • The competitive position of a country’s exports depends not only on the nominal exchange rate, but also on the rate of inflation
    • When a country experiences inflation while its nominal exchange rate remains fixed, its exports lose competitiveness
    • To correct for the effect of inflation, economists watch the real exchange rate, not the nominal rate
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Let— H = nominal exchange rate in yuan per dollar h = the real exchange rate PUS = US price level PCN = Chinese price level Then h = H (PUS/PCN) This is the simplest of several ways to calculate the real exchange rate. For some other examples, see this post by Menzie Chin on Enconbrowser.com: http://www.econbrowser.com/archives/2010/09/the_yuans_cours_1.html
  • 8. How fast is China’s real exchange rate changing?
    • China’s nominal exchange rate appreciated by 2.5 percent from June to October, equivalent to about an 8% annual rate of appreciation
    • China’s inflation rate is about 3.5% (August data) compared with about 1% in the US
    • Adding 8% nominal appreciation to an inflation differential of 2.5% suggests that China’s real exchange rate is appreciating an annual rate of about 10.5% per year
    • At that rate a 20% undervaluation would disappear in less than 2 years and a 40% undervaluation in about 3 years
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ China’s inflation rate is faster than that of the United States, and it is rising month by month
  • 9. Caution—can we be sure China’s policy won’t change again?
    • But . . . isn’t there a flaw in the argument? Can we be sure China’s policy won’t change again?
    • The 8% rate of annual appreciation from August to October might slow.
    • Hints from insiders at the Chinese central bank suggest they may hold the rate of nominal appreciation to no more than 3% per year in the future
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
    • On the other hand . . .
    • Any attempt by the PBoC to slow the rate of nominal appreciation would have unintended consequences
    • Printing more yuan to buy US dollars would tend to push up China’s rate of inflation even further
    • Slower nominal appreciation plus more inflation would still mean rapid real appreciation
  • 10. The Bottom Line: Manipulation Not Completely Successful
    • The bottom line . . .
    • Yes, in the plain-English sense of the word, China is a currency manipulator
    • In reality, however, the attempted manipulation is not fully successful
    • Despite the best efforts of the PBoC, inflation is causing the real exchange rate to appreciate much more rapidly than the nominal rate, undermining competitiveness of Chinese exports
    Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Photo source: http://commons.wikimedia.org/wiki/File:CE_Made_in_China.jpg

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