Home > Uncategorized > Slow and Steady: the rise of the Renminbi

Slow and Steady: the rise of the Renminbi

cartoon from davegranlund.com

On June 19th, the Chinese government announced plans to allow the RMB to appreciate against the dollar. By allowing more flexibility of its exchange rate, the decision could help defuse long-standing controversy over the valuation of the RMB. After three years of allowing the RMB to appreciate, in 2008 China’s central bank decided to peg its currency to the dollar. Since the central bank’s June announcement, the RMB has hit a high of 6.77 against the dollar. The RMB’s .5% daily trading band remains unchanged. The timing of the announcement was opportune, as China’s currency was an expected topic of discussion at June’s G20 summit in Toronto.

The reaction from the U.S. has been guarded. President Obama acknowledges the policy announcement as a step forward but claims it is too early to evaluate the effects on the global economy. Members of Congress have long argued that the undervaluation of the RMB gives China an unfair trade advantage. New York Senator Charles Schumer has been instrumental in pushing for legislation to “correct” this imbalance. This year, Senator Schumer introduced a bill to authorize placing retaliatory duties on artificially cheap Chinese imports. The Senate is expected to vote on the bill later this month. In response to the decision to allow the RMB to appreciate, albeit slowly, against the dollar, Schumer maintains his pessimistic stance claiming that without further detail to China’s plans, “we will have no choice but to move forward with our legislation”. Critics of China’s currency policy point to a June World Bank report recommending a more flexible RMB exchange rate. The report suggests a more flexible exchange rate would make China’s monetary policy more independent, which would allow the central bank to have more control over interest rates.

It is unclear how significant of an impact a small appreciation of the RMB will have. For U.S. companies, a stronger Chinese currency would increase Chinese consumers’ buying power and make U.S. goods more affordable in the Chinese market. A stronger RMB would make Chinese exports more expensive in foreign markets, making domestic goods more competitive. At the same time, American consumers will pay more for Chinese goods.

China’s decision to depeg the RMB from the dollar is seen as mostly being in China’s interest. Worries about inflation, competitiveness of Chinese sales to Europe and a desire to increase Chinese consumers’ purchasing power are all important drivers of the PRC’s recent decision. A stronger RMB will lower the cost of China’s high commodity imports. Most importantly China’s decision to allow a gradual appreciation of the RMB should be seen as a decision independent of foreign interests and pressure. Still, this will not stop the rest of the world from pushing for a faster, bigger rise in the RMB.

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