China: A Nation Depreciating its Currency to Economic Prosperity?

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"A stronger yuan is "essential" for both the Chinese and world economies.... The Chinese yuan was substantially undervalued."¹

- International Monetary Fund,² in 2010.

"Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies - because that's what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject".³

-Paul Krugman,⁴ in 2010, on constant yuan devaluation by China

Introduction

With allegations pouring in from all quarters that China was consistently undervaluing its currency, the Renminbi (RMB or yuan)5 , the issue occupied central stage in global economic debates in 2010. By the mid-2000s, according to Chang6 and Shao7 (2004), the yuan had been undervalued by as much as 22.5%8 . The International Monetary Fund (IMF) said the yuan had been undervalued by 5% to 27% as of July 2010.9Experts opined that undervaluation of the Chinese currency was affecting other countries and leading to trade imbalances in many countries, specifically the US, with China.

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1 "IMF Says Stronger Chinese Currency "Essential" as Asia Powers Ahead, "www.channelnewsasia.com, April 22, 2010

2 The International Monetary Fund (IMF) is a global organization with 187 member countries, established in 1944, to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

3 Paul Krugman, "Killer Trade Deficit, "http://krugman.blogs.nytimes.com, August 16, 2010.

4 Paul Krugman is the recipient of the 2008 Nobel Prize in Economics for his contributions to New Trade Theory and New Economic Geography. He teaches economics and international affairs at Princeton University, is Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times.

5 Renminbi (denoted as RMB), is the official Chinese currency, It is also known as the yuan. As of May 20011, US$ 1 = yuan 6.48910

6 Gene Hsin Chang, Associate Professor, Department of Economics, The University of Toledo, Toledo

7 Qin Shao, Assistant Professor, Department of Mathematics, The University of Toledo, Toledo

8 Chang and Shao (2004), "How Much is the Chinese Currency Undervalued? A Quantitative Estimation, "China Economic Review, Vol. 15, page 366-371.

9 "China Yuan Undervalued by between 5 to 27 pct, "www.reuters.com, July 27, 2010.