![]() ![]() concerns that capacity to manage exchange rate volatility is limited, given fragile Chinese banks and underdeveloped financial markets and.the need to sustain rapid economic growth to absorb the exodus of workers from rural areas, and concerns about social unrest should growth falter.This caution can be attributed to a range of factors: In practice, the bilateral USdollar rate has continued to be tightly managed and further RMB appreciation against the dollar has so far been limited.Īll indications are that China intends to proceed cautiously in increasing exchange rate flexibility. It also announced that the RMB would no longer be formally pegged to the US dollar, but would be managed with reference to a basket of currencies. A supporting argument is that greater flexibility would assist economic management in China by providing the capacity to run a more independent monetary policy, reducing the risk that an undervalued exchange rate will lead to excessive monetary expansion and inflation.Īgainst the background of these pressures and concerns, the Chinese Government revalued the RMB by 2percent against the US dollar on 21 July 2005. In this view, exchange rate adjustment by China is one element of a wider set of measures needed to address these imbalances, including fiscal consolidation in the US and structural reforms in Europe and Japan. But they highlight the risk of a protectionist backlash in the US and elsewhere - a backlash that would pose real risks for the world economy.Ī concern of many observers, such as the International Monetary Fund (IMF), is that the continuing build-up of global imbalances entails substantial risks to the world economy. 3 These responses are to a large extent misguided, as RMB revaluation will by itself have limited impact on the UScurrent account. the scale of China’s accumulation of foreign reserves, reflecting strong capital inflow and the authorities’ efforts to hold the RMB stable against the US dollar.Ī major source of external pressure has come from US manufacturing interests and elements within the US Congress who have threatened to impose retaliatory duties on Chinese imports if the RMB is not allowed to appreciate.China’s rapid economic growth and increasing role in the world economy and.depreciation of the US dollar (and hence, the RMB) against most other currencies from early 2002.the widening of the United States current account deficit to over 6percent of USGDP.This change of attitude reflects a number of factors: There is a widespread view that the RMB is now significantly undervalued, with some arguing that this is a matter of global concern. More recently, however, there has been mounting external pressure on China to allow the RMB to appreciate against the dollar. During the 1997-98 Asian financial crisis, China was praised for resisting pressure to devalue the RMB, which could have triggered further destabilising depreciations of other Asian currencies. Under the peg, China was able to control previously high inflation and sustain GDP growth at an average rate of nearly 9percent. For most of this period China’s exchange rate regime attracted little criticism: indeed, it was widely seen as contributing to internal and external stability. 2 The RMB had, until July 2005, been pegged to the USdollar at a virtually unchanged rate for a decade. The value of China’s currency, the renminbi (RMB), has recently become a contentious issue. Precipitate moves could be costly both to China and to global markets. A more flexible exchange rate is in China’s medium-term interests, but the pace of adjustment and its sequencing with other reforms will need to be carefully managed. While the contribution of the RMB to external imbalances is often exaggerated, currency adjustment will be a necessary element of the adjustment process. This does not appear to have had significant adverse effects on the Chinese economy to date, but the costs of holding down the exchange rate are likely to rise in the future. The size of the imbalance in China’s external payments suggests that the RMB is significantly undervalued. The Chinese Government has made cautious initial steps toward a more flexible regime, but faces continued pressure to allow further currency movement. Instead, a more flexible exchange rate regime is argued to be necessary for internal balance by providing policy makers with a more effective monetary policy instrument. ![]() Others assert that any plausible appreciation of the RMB is unlikely to affect global current account positions significantly. Some commentators argue that significant undervaluation of the renminbi (RMB) is contributing to global external imbalances. China’s currency regime has recently become a contentious issue.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |