China's Fixed Exchange Rate

As we have talked about in class, the two countries responsible for bringing the world out of the worldwide recession were the United States and China. The difference between these two countries however, has been the speed of their recovery from the recession. This is where the Chinese "yuan" comes into play, because the Chinese government has chosen to keep their currency at a fixed rate in order to make their goods cheaper to export than the competition, essentially creating a constant trade imbalance. According to the New York Times, this has been met with a lot of criticism from Western nations, "including President Obama, (who) have called for China to let its currency, the renminbi (another term for yuan), appreciate against the dollar, arguing that an artificially cheap renminbi increases Chinese exports at the expense of the rest of the world’s economies". However Chinese officials have remained stubborn on this issue, because this demand for goods has allowed for China's massive growth in GDP per year, meaning this will be a test of Western and Chinese relations.

China had previously allowed the yuan to appreciate against the dollar back in 2008, "when world economies sagged under the weight of the United States banking and securities collapse. Most economists say the Beijing government acted to maintain the price advantage of Chinese manufactured goods, a linchpin of the Chinese economy, at a time when exports were drying up". China's export slowdown caused it's GDP growth to fall four percent in 2008, although its GDP recovered and grew eight percent because of its massive stimulus plan and currency stabilization in 2009. This may have made sense for China back in 2009, but the Chinese economy is again robust and recovering, and it seems unfair that it maintains these practices against other nations. The reasoning, according to the central bank head Zhou Xiaochuan, is that China should be cautious about revaluing its currency, or at least as long as major economies continue to have slow growth, although he said that these practices "will be abandoned sooner or later". However, if China were to allow its currency to appreciate, wouldn't this cause demand for goods from other countries and speed their recovery as well?

According to Eswar S. Prasad, a Cornell University economist and former head of the International Monetary Fund’s China branch, "“Maintaining an undervalued exchange rate certainly benefits China, but at the expense of other countries that lose their relative competitiveness in foreign trade" as well as stating that China would be "helpful if, given its economic strength and solid recovery prospects, China’s exchange rate policy could make a contribution to the global recovery rather than being frozen in place while other economies tend to their recoveries". Therefore, China controls a major part of the recovery in the global recovery, however it is also unfair to Western nations trying to recover as well because Chinese goods are cheaper and don't allow for fair competition in the world market. However, by China having such policies, it has allowed for it's continuation of growth and prosperity, as well as helping it create a middle class. Therefore the exchange rate of the yuan cuts two ways, even though the Western nations wish to see it become a fair competitor in the world market in order for their goods to become more competitive to fuel their own recoveries. This will truly be a test in Western-Chinese relations, and its outcome will influence the recovery the world market.

Does the yuan need to be set at a fixed exchange rate, or should it ever have been in the first place? How does this influence the recoveries of Western nations? Is this fair to other nations in the world market? What would happen if China allowed the yuan to appreciate? How will this be a test of Western and Chinese relations?