RE: China’s Renminbi Valuation Discussion
The following memo provides a summary of the basic discussion of the valuation of China’s Renminbi, the tumultuous situation surrounding global discussion regarding its valuation, and what appreciation of the Renminbi might mean for the global economy. This analysis is based primarily upon the Fung & Wong article, “China’s Renminbi: ‘Our Currency, Your Problem’?”.
Valuation Controls Placed Upon the Renminbi
Over the past couple decades China has maintained a high level of economic growth rate of approximately 9% per year. Recently, many countries began questioning the valuation of China’s currency, the Renminbi, and China’s exchange rate policies. These other countries pointed
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The article mentions that China created a surplus of Chinese currency within its own borders by limiting the amount of foreign currency in circulation there, and trading about 8 Renminbi for every US Dollar they received in return. It specifically mentions that, “Domestic money supply automatically increased, creating a risk of over-investment and inflation in the country.” In essence the PBoC pegged the Renminbi’s value to the USD, lowered the discount rate (undervalued the Renminbi in setting its exchange rate at 8 Yuan per USD, rather than say 5 Yaun per USD), which resulted in an increase in the domestic money supply. It also mandated the reserve requirements of all currencies for commercial and central banks. However, these reserve requirements for foreign currencies were drastically high and quite low for domestic currency, which resulted in increased flow of available Renminbi to the local market. Meanwhile, government controls and bonds issued to commercial banks managed to, for the most part, keep inflation in check. While revaluing the Renminbi would have likely curtailed inflation and reduced the amount of Renminbi in circulation, doing so would likely have also significantly impacted China’s economical growth by increasing the price of exported goods.
China argues (in response to foreign calls for revaluation of the Renminbi) that, while trade deficits with countries like the US and Great Britain have largely