This document discusses several topics related to China's currency (renminbi) and exchange rates: 1) It outlines different arguments from the US and China regarding China's devaluation of the renminbi, with the US citing its large trade deficit and China saying the move pegged the currency to a basket of currencies. 2) It explains that countries like Japan, South Korea, and others in Asia are less vocal than the US in criticizing China's currency valuation because they have strong economic ties to China and benefit from processing trade. 3) Finally, it discusses the potential consequences of China revaluing its currency higher, including reduced Chinese exports and improved trade balances and GDP for countries like the US

1. China’s devaluation of
renminbi
Macro Economics

2.  US Arguments
 huge trade deficit of US$233 billion
 threatened to impose a 27.5% tariff
 China Arguments
 it was done to peg to basket of currency
 US should improve its economy
Different arguments used by the U.S. and Chinese
governments about the renminbi.

3.  They have strong economic links with china
 Many company of these countries have moved there
production units to china keeping only high value
components production at home
 The above countries capture most of the benefits by
processing trade with china
 china imports the raw materials/intermediate goods
from these countries then processes and re-exports
them
Why are Japan, the newly industrialized economies (NIEs)
and developing Asian-Countries less vocal than the US on the
valuation of the renminbi?

4.  Volatility in the exchange rate exerts a powerful
impact on exports, imports and the trade balance
 It affects level of development of the country
through its effects on foreign direct investment
inflows
 Depreciation in exchange rate gives rise
to inflationary pressures; imported good become
more expensive both to the direct consumer and to
domestic producer
How does the exchange rate of a currency and its volatility have a direct
impact on
the economy?

5.  Exchange rate of a currency is determined by various
ways:-
 Floating exchange rate:-In this case exchange rate of
a currency is allowed to fluctuate with the dynamics
of the market.
 Fixed/Pegged exchange rate:-Here the currency of a
country is fixed or pegged with currency of other
currency
 Currency Pair:- In this scenario one currency is
dependent on another currency in foreign exchange
market
How is the exchange rate of a currency determined?

6.  Current Account:-China had a huge current account
surplus because of its export earnings
 Capital Account:-
 Direct Investment flows-It is Positive and shows
continuous increase from 2002 to 2006
 Portfolio Investment flows-It is negative
 International reserves:-
 Chinese government had huge increment in
international reserves
Analyze the different components of the Chinese balance of
payment.

7.  It held the value of renminbi at constant rate of RMB
8.28 over a decade
 china has passed legislations by which it restricts the
amount of foreign currency in the state
 On a daily basis each bank has to maintain the
specified ratio of foreign currency
Do you think the renminbi is undervalued against the US
dollar? How can China
Maintain the exchange rate of the renminbi?

8.  To make its exports more competitive in the global
markets
 To encourage Chinese products in the global markets
and promoting various industries to set up low cost
production units in china
 This helped china to become world’s third largest
exporter with an estimated US $970 billion for the
year 2006
Why does the Chinese government want to keep its currency
at an artificially low level
Against the US dollar?

9.  Sterilized intervention:-Central bank absorbs all the
extra renminbi by selling bank/government bonds
 Interest Rates:-By increasing the interest rate of the
central bank
 Reserve Ratio:-By increasing the reserve ratio of
central bank
Exchanging all of China’s US dollars for renminbi can lead to
inflationary pressure.
How does China avoid this risk?

10.  It costs china in terms of inflation due to more money
supply
 It fixed the foreign reserve ratio
 Policy regarding buying of US treasury bills
Does maintaining a quasi-peg to the US dollar have a cost for China? Does the
policy of buying US Treasury bonds have any negative impact on China’s or the
world’s Economy?

11.  Chinese export will become costly and demand for Chinese
product will goes down
 For US and European countries, their trade deficit with
china would reduce, GDP improves
 neighboring countries like Japan, Korea would be affected
as they outsource their most of processing work in China
 Other Asian countries which makes same kind of products
would get some chance to compete with China
What would be the consequences of a revaluation for China, western
countries, Japan, NIEs and developing countries?