Is the Chinese currency, the renminbi, dangerously undervalued and a threat to the global economy? Over thirty important experts offer their views

International Economy, The, Spring, 2003

China's legitimate desire for a stable exchange rate would be enhanced by a managed float of the renminbi. The rate is now kept virtually constant against the dollar but, in light of the dollar's sharp rise against virtually every other currency from 1995 until a year ago and its substantial fall since, the "real effective" (inflation-adjusted, trade-weighted) exchange rate of the renminbi has been quite unstable. China would promote many of its own purposes, as well as international prosperity, by floating the renminbi.

No, China's role is a blessing to the world economy.

GENE H. CHANG
Director, Institute for Asian Studies, University of Toledo,
Ohio, and co-editor of China Economic Review

Is the RMB undervalued? The purchasing power of the RMB is higher than its official exchange rate, a 4.75:1 ratio, but this is common for all developing countries. The same ratios for India and Russia are 5.33 and 4.18 respectively, and average ratios for low-income and lower-middle-income countries are 4.85 and 4.05 respectively. The RMB is not abnormal. The official exchange rate of the RMB has experienced a de facto devaluation of about 5 percent since 1999, due to domestic deflation and a rise in productivity. Yet this did not make the RMB substantially undervalued, as the black market exchange rate for the RMB in 2002 was the same of the official rate.

The U.S. and Japanese concerns about an undervalued RMB come from the flood of cheap products from China. The Chinese labor cost is low, as is its productivity. The low Chinese labor cost was due to an unlimited supply (120 million-plus) of rural surplus labor, who are willing to work at the subsistence level. It is a market outcome and little can be done to alter it at this stage.

Although China has substantial trade surpluses with the United States, it runs huge trade deficits with its other Asian neighbors. China's overall current account surplus is $30 billion, which is only one quarter of Japan's. Foreign capital flooded to China in recent years because of the recessions in the United States and Japan and unstable situations in Indonesia, Philippines, and other countries, not because of an undervalued RMB.

Revaluation of the RMB is not a solution for the domestic economic problems of the United States and Japan. First, the trade deficits with China account for less than 1 percent of U.S. GDP; thus the effect is very limited. Second, a revaluation of the RMB may cause the trade deficits to widen rather than shrink, because China's products are often necessities with inelastic demands. In this case, a J-curve could prevail. Finally, revaluation of the RMB must result in a loss in consumer's surplus in importing countries.

Rapid growth of the Chinese economy, rather than a revaluation of RMB, is the most effective solution for the concerned problems. As its economy grows, China will increase imports from the United States, Japan, and the rest of world. China (including Hong Kong) already imports more from the rest of Asia than Japan. China's demand turned the otherwise-soft world steel market to buoyant in 2002. This momentum continues as U.S. and Japanese auto parts and assembled autos flood into China this year. In fact, China's overall trade balance already turned to a deficit in January, 2003. It is therefore evident that the concern about the undervalued RMB is unwarranted, and that the growth of China's economy is a blessing rather than a threat of the world trading system.