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

The arbitrarily low level of the RMB is a serious problem for the global economy. In addition to being the cause of exporting deflation to the world and a drag on the dollar, it can well wipe out or seriously affect the hope for economic development of many developing countries. Already new foreign direct investment (FDI) to Southeast Asia, which has been the engine for growth of the region, is dropping substantially. Although currency level is only one of the causes, the arbitrarily low RMB is certainly accelerating the shift of FDI from Southeast Asia to China.

The damage can be more devastating for less developed economies. In January 2005, import quotas on textile trade will be abolished. With quotas gone, Chinese textile exports are expected to dominate the global textile market. The losers will be the developing countries depending upon textile exports for their growth. Pakistan depends upon textiles for 73 percent of their total exports. For India, Indonesia, and the Philippines, the figure are 23 percent, 15 percent, and 8 percent respectively. For these countries, competition with Chinese textile exports coupled with an arbitrarily low RMB will most likely lead to the devastation of their textile industries which is so important for them. From the development policy perspective, such an outcome should definitely be avoided. The most market-consistent way to deal with this problem is to appreciate the RMB or to shift the RMB to a float system before the damage is done. Otherwise, a huge amount of economic aid may be necessary to offset the negative impact. We also need to be fully reminded that the most vulnerable countries are the countries with much more importance after September 11 for security and anti-terrorism reasons.

Yes, dangerously undervalued.

CHRISTOPHER W. HUGHES
Senior Research Fellow & Deputy Director, Centre for the Study
of Globalisation and Regionalisation, University of Warwick

The renminbi is undoubtedly dangerously undervalued with potentially destabilizing consequences for the regional economy in East Asia. The risk is of China again triggering a series of competitive devaluations that could lead to a repeat of the Asian financial crisis of 1997. Japan is often blamed for initiating the crisis in the ASEAN states due to the close to 60 percent depreciation of the yen against the dollar in 1995-1996, thus squeezing out their exports at the higher value end of the production chain. However, it is often forgotten that China in 1994 deliberately devalued the renminbi by 33 percent, thus squeezing ASEAN exports also at the lower end of the production chain. China's growing image as an economic competitor at all stages of the production chain, resulting from a range of comparative advantages including the undervaluation of the renminbi, could force Japan into the devaluation of its own currency to maintain competitive advantage. Japan is once again considering trying to export its way out of recession and to facilitate this by forcing down the yen. At the same time, the United States also appears content to see the value of the dollar fall. If these three major economic players in East Asia engage in competitive devaluations, for the ASEAN states could be dire. They are already suffering from heavy competition from China in many of their traditional exports, and China's dollar peg means that it is sucking up investment from Japan and outside the region that might otherwise have gone to Southeast Asia. Devaluations by Japan and China as their competitors at the top and bottom ends of the production ladder will once again choke off their export-led growth and precipitate financial instability. Greater currency coordination is still necessary in East Asia, and Japan should make further moves to internationalize the yen in order to prevent damaging exchange rate fluctuations.