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The Implications of Chinese Monetary Policy on Global Imbalances

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China’s exchange rate policy has been a contentious issue in the global economy, particularly between the China and the West. The West has long criticized China for keeping the Yuan at an exceptionally low value. They claim China enjoys an advantage position due its manipulated lower Yuan value, as it makes China exports cheaper. The US president, Mr. Obama, accused China of being a currency manipulator during his early days in office.

West’s Concerns

The West says China had pegged the value of the Yuan to the dollar. The Yuan’s value has not fluctuated from its current value of ¥6.83 to the dollar since July, 2008. China denied Obama’s claim and resisted pressure from him to raise the Yuan’s value. in April of this year, during the Nuclear Suppliers Group (NSG) meeting in Washington, DC, Chinese Premier Hu Jintao said, “Yuan rise would neither balance Sino-US trade nor solve the [US] unemployment problem,”

Yuan value
When China recorded an 11.9 percent  growth rate in the first quarter of 2010, many economists and analysts suggested to that nation that it would be fair to share the growth of the economy by appreciating the Yuan. However, China did not find any pressing reasons to do so then.



The US Retaliation

US Treasury Secretary Tim Geithner postponed submitting his report on whether China was manipulating its currency value to Congress in April. It was rather a soft approach by the US, hoping China would reciprocate positively by tightening its monetary policy. It was also a revelation that the US was wary of trade war with China. China has invested nearly 70% of its vast foreign reserves in US Treasury bonds.

Instead of opting for trade war, the US resorted to several political actions with a touch of some economic flavor against China. It approved $6.4 billion in arms sales to Taiwan, amid accusations of arrogance and cold-war mentality from China. The package included 114 Patriot missiles, 60 Black Hawk helicopters and communications equipment for Taiwan’s military use. Rumors  from China side indicated that the Chinese PLA had suggested China should sell its US bonds in retaliation for the Taiwan arms sale.

President Obama met Tibet’s spiritual leader, the Dalai Lama, despite warnings from China. The US imposed anti-dumping duties on tires and iron imports from China. Cyber attack allegations and condemnations were also exchanged between the two countries for several months last year.

The US also conducted joint military exercises with South Korea in the South China Sea, ostensibly to counter threats from North Korea. North Korea was alleged to have sunk a South Korean submarine with a torpedo. China warned the US sternly of the possibility of serious consequences stemming from the exercises, and conducted its own exercises separately in the South China Sea.

Chinese Response

China finally responded in May regarding the exchange rate of Renminbi, another name for the Yuan. It said in May of this year that it was committed to the reforming of the exchange rate regime, but stressed the reform would only be based on the needs of China’s own economic development and that China would not succumb to external pressures. From then on the West waited eagerly for the Yuan’s appreciation.

Although, the G-20 ministerial conference spared Chinese currency policy from a specific mention in its communique during the first week of June, the IMF and the US issued separate letters to the G-20 participants, pointing out the need for the Yuan’s appreciation. Both the US and the IMF stressed the Yuan appreciation as the key for global re-balancing of economies. The G-20 summit at Toronto in the last week of June also did not make any explicit mention of Yuan value, as China warned before the summit that its monetary policy issues could not be mentioned in international forums.


China announced on June 19 that it was leaving a part of the Yuan value to market influence. This meant that the major part of the value of the Yuan would be kept unchanged and the remainder would be allowed to fluctuate according to market requirements, while still holding a substantial part of the Yuan’s value under regulation. After the announcement, the Yuan slightly appreciated by 0.7% the last week of July.

As of September 17, the Yuan had appreciated by 1.63% as compared with the base pegged value of ¥6.83 to the dollar. This was nowhere near the appreciation of 20% anticipated by the IMF in its letter issued during the G-20 ministerial meeting. The West is still looking for appreciation of the Yen, as if it were the only solution left for re-balancing the global economy.

Sixteen nation Euro zone region chairman Jean-Claude Juncker said on Sept 17 that he would meet the two Chinese policy makers on Oct. 6 in Brussels to discuss exchange rate issues and monetary policy. The EU appreciated the China announcement of the flexible Yuan in June, but felt progress in implementation is slow.

Unless one sees the internal contradictions and their dynamics and influences existing in their own economies on the external front, looking for external reasons for the problems of growth-oriented economies may not be as fruitful as expected. Even as the discussion of the Yuan’s appreciation is still on the table, the EU started criticizing the Japanese government’s decision to intervene and weaken the value of the Yen. After the Yen, what currency is to be blamed?

By the way, is anybody worried about the vast trade deficits between developing countries and the US and the western European countries?

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About Sekhar

  • Ruvy

    Another breath of fresh air! A look at financial policy without the typical American whining….

  • Hi Ruvy, I’m honored.

    I’ve read your critical article on BC. I’ve written a long comment on it but withdrawn it at the last moment, to ascertain what I have read and listened so far, are facts.

    I’ve come to known that I’ve needed to study more before commenting.

    I may soon post the matter as an article instead of comment. I thought that would be better.