Transcript China’s Undervalued Currency

China’s Undervalued Currency
Jonathan Piekutowski
The Current Account
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For the past ten years China has been
developing a huge current account surplus
(approximately $239 bil. Or 9.1% of GDP in
2006)
This was accomplished by fixing their
renminbi currency at approx 8.28 per dollar.
Deregulation
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Due to trade sanction threats from the US, China
revalued the currency in July of 2005 by 2.1% and
allowed it to appreciate at a slow rate as well as
created a narrow band for it to fluctuate within.
Since the deregulation to January 2008, it has
appreciated approximately 13%. The slow
appreciation is due to the Chinese government
fearing the loss of their exportation ability.
2008-07-01
2007-08-01
2006-09-01
2005-10-01
2004-11-01
2003-12-01
2003-01-01
2002-02-01
2001-03-01
2000-04-01
1999-05-01
1998-06-01
1997-07-01
1996-08-01
1995-09-01
1994-10-01
1993-11-01
1992-12-01
1992-01-01
1991-02-01
1990-03-01
1989-04-01
1988-05-01
1987-06-01
1986-07-01
1985-08-01
1984-09-01
1983-10-01
1982-11-01
1981-12-01
1981-01-01
10.0000
9.0000
8.0000
7.0000
6.0000
5.0000
Yuan to 1USD
4.0000
3.0000
2.0000
1.0000
0.0000
Silver Lining
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Economists, believe that although China
opposes the revaluation it would be good for
their economy. This is because inflation was
going up due to not only the current account
and trade surplus, but because of cash inflow
of speculators believing that the currency will
continue to appreciate because of the threat
of trade sanctions forcing China to revalue
the currency.
Silver Lining cont.
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Absorption (A) is a measure of a country’s
demand for goods and services from
anywhere in the world
A= C + I + G
A revaluation of the currency would shift
demand from home to foreign goods, which
would battle inflation, and the huge trade
imbalance, but unemployment would rise
Absorption and Currency
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An increase of absorption would also help the lower
the trade imbalance and would keep unemployment
under control due to the increase in consumption.
Because of the revaluation of currency Chinese are
more willing to demand foreign goods and less
willing to demand domestic because they cost more.
At the same time, inflation is reduced naturally
because the currency is being forced up in value.
Cont.
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It is also proposed that China increase it’s
government and private spending.
Currently China saves 45% of it’s GNP every
year.
Increased spending would only help
consumption and help balance the economy
and the currency.