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Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ How Successful is China’s Currency Manipulation?  Pos...
Is China a Currency Manipulator? <ul><li>The US Treasury has repeatedly avoided naming China as a “currency manipulator.” ...
How does China manipulate its exchange rate? <ul><li>The Chinese government controls its exchange rate by buying US dollar...
Why does China manipulate its exchange rate? <ul><li>The Chinese government is not fully transparent about its objectives ...
Has China changed its currency policy? <ul><li>From 2005 until mid-2008, China allowed its currency to appreciate graduall...
Is China doing enough? <ul><li>Many critics say that China’s recent policy change is not nearly enough </li></ul><ul><li>T...
Watch the real exchange rate, not the nominal rate! <ul><li>The competitive position of a country’s exports depends not on...
How fast is China’s real exchange rate changing? <ul><li>China’s nominal exchange rate appreciated by 2.5 percent from Jun...
Caution—can we be sure China’s policy won’t change again? <ul><li>But . . . isn’t there a flaw in the argument? Can we be ...
The Bottom Line: Manipulation Not Completely Successful <ul><li>The bottom line . . . </li></ul><ul><li>Yes, in the plain-...
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How successful is chinas currency manipulation

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Transcript of "How successful is chinas currency manipulation"

  1. 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. 2. Is China a Currency Manipulator? <ul><li>The US Treasury has repeatedly avoided naming China as a “currency manipulator.” </li></ul><ul><li>It is felt that if used officially, those words would be seen as a declaration of economic war </li></ul><ul><li>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 </li></ul>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. 3. How does China manipulate its exchange rate? <ul><li>The Chinese government controls its exchange rate by buying US dollars in exchange for yuan </li></ul><ul><li>Doing so drives down the yuan’s value on foreign exchange markets </li></ul><ul><li>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 </li></ul><ul><li>When the yuan becomes stronger (fewer yuan per dollar), it is said to appreciate </li></ul>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. 4. Why does China manipulate its exchange rate? <ul><li>The Chinese government is not fully transparent about its objectives </li></ul><ul><li>Most observers assume that China’s attempts to resist appreciation of the yuan reflect strong political influence of big export industries </li></ul><ul><li>Other things being equal, a weaker yuan means more exports, and more profits for Chinese exporters </li></ul>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. 5. Has China changed its currency policy? <ul><li>From 2005 until mid-2008, China allowed its currency to appreciate gradually against the dollar </li></ul><ul><li>Then, during the height of the global crisis, China held the exchange rate almost exactly fixed </li></ul><ul><li>Since June 19, 2010, China has again allowed gradual appreciation of the yuan </li></ul><ul><li>From June 19 to September 15, the yuan had appreciated by about 2.5 percent </li></ul>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. 6. Is China doing enough? <ul><li>Many critics say that China’s recent policy change is not nearly enough </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>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. 7. Watch the real exchange rate, not the nominal rate! <ul><li>The competitive position of a country’s exports depends not only on the nominal exchange rate, but also on the rate of inflation </li></ul><ul><li>When a country experiences inflation while its nominal exchange rate remains fixed, its exports lose competitiveness </li></ul><ul><li>To correct for the effect of inflation, economists watch the real exchange rate, not the nominal rate </li></ul>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. 8. How fast is China’s real exchange rate changing? <ul><li>China’s nominal exchange rate appreciated by 2.5 percent from June to October, equivalent to about an 8% annual rate of appreciation </li></ul><ul><li>China’s inflation rate is about 3.5% (August data) compared with about 1% in the US </li></ul><ul><li>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 </li></ul><ul><li>At that rate a 20% undervaluation would disappear in less than 2 years and a 40% undervaluation in about 3 years </li></ul>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. 9. Caution—can we be sure China’s policy won’t change again? <ul><li>But . . . isn’t there a flaw in the argument? Can we be sure China’s policy won’t change again? </li></ul><ul><li>The 8% rate of annual appreciation from August to October might slow. </li></ul><ul><li>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 </li></ul>Post P101015 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ <ul><li>On the other hand . . . </li></ul><ul><li>Any attempt by the PBoC to slow the rate of nominal appreciation would have unintended consequences </li></ul><ul><li>Printing more yuan to buy US dollars would tend to push up China’s rate of inflation even further </li></ul><ul><li>Slower nominal appreciation plus more inflation would still mean rapid real appreciation </li></ul>
  10. 10. The Bottom Line: Manipulation Not Completely Successful <ul><li>The bottom line . . . </li></ul><ul><li>Yes, in the plain-English sense of the word, China is a currency manipulator </li></ul><ul><li>In reality, however, the attempted manipulation is not fully successful </li></ul><ul><li>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 </li></ul>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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