US, “China is MANIPULATING RMB!”
06 Dec 2010 1 Comment
in Uncategorized
China used to have fixed exchange rate, so the government can set its currency at certain level. An exchange rate is the value of one currency expressed in terms of another. The system China used to have, a fixed exchange rate, is an exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, or to the average value of a selection of currencies, or to the value of some other commodity, such as gold. Therefore, Chinese Yuan used to be very stable as market forces didn’t cause the currency to appreciate or depreciate. However, China changed their exchange rate system to a managed currency exchange rate, also called as “managed float”. A floating exchange rate is an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and the supply of the currency on the foreign exchange market. However, since it’s “managed,” there are several policies in managing the demand and supply; therefore, in “managed floating” system, the value of currency is not determined solely by the demand and supply. Although some economists mention that at one point, China went back to its old, fixed exchange rate as the value of Yuan greatly depreciated, but there was no official announcement on dismissing the managed float system.
Currently, according to the article, US government is becoming suspicious about China’s RMB as the value of RMB has been very low. US insists that the value of RMB is manipulated by Chinese government. In floating exchange rate system, as the diagram on the left shows, the currency appreciates when there’s high demand with low supply, while it depreciates when there’s low demand with high supply. An appreciation is an increase in the value of one currency in terms of another currency in a floating exchange rate system, while a depreciation is a fall in the value of one currency in terms of another currency. According to the US, China is depreciating the currency on purpose because China wants higher profit from exporting. US and other foreign countries will import goods from China because the value of currency is depreciated, which allows foreign consumers to buy greater amount at lower price. As many countries now want to buy RMB, the demand will increase, whereas the supply is not increase as rapidly. Therefore, the RMB should appreciate.
However, surprisingly, the value of RMB is still very low, as if it were not affected by the demand and supply of the world market. That is, China uses managed floating exchange rate, but is employing various policies to manipulate the value of RMB to keep it low. Weak RMB causes US to import more of Chinese goods, which lessens the domestic businesses’ market. Consumers will be happy about weak RMB as they can buy the same type of goods at a much lower costs, while local businesses are suffering from it. On the other hand, when the RMB is strong, Chinese local businesses will get damaged as the consumers will buy cheaper foreign goods. Unlike how RMB is expected to react to the increasing demand for the currency, RMB is kept very low and this situation causes US to cast doubt on the currency manipulation.
Dec 14, 2010 @ 04:44:52
You have raised many good points and I liked the way you defined terms however you did not exactly explain how the Chinese are manipulating their currency.