China: A Nation Depreciating its Currency to Economic Prosperity?

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Case Details:

Case Code : ECON026
Case Length : 19 Pages
Period : 1950-2007
Pub. Date : 2008
Teaching Note :Not Available
Organization : --
Industry : -
Countries : Norway, Denmark, Finland, Iceland, and Sweden

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction Contd...

For example, China had a trade surplus of US $ 198 billion with the rest of the world in 2009 and its exports to the US were more than four times its imports from that country.¹⁰ China, however, maintained that its currency was not substantially undervalued and that it was moving ahead with its currency reforms. The Chinese central bank, People's Bank of China (PBoC), stated, "China's central bank has decided to further promote the reform in the RMB (yuan) exchange rate mechanism, and strengthen the flexibility of the RMB exchange rate."¹¹

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Analysts were divided in their opinion on the problems caused by the alleged undervaluing of the yuan to China's trade partners. Paul Krugman, a leading economist and Nobel laureate, argued that running this level of current account surplus had caused job losses in its trading partners. He said, "Unlike the dollar, the euro, or the yen, whose values fluctuate freely, China's currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses."¹²...

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10 "China Exploiting Global Trade Rules, "www.economicstimes.indiatimes.com, March 16, 2010

11 "China Central Bank to Further Promote Currency Reform, "www.economicstimes.indiatimes.com, June 19, 2010.

12 Paul Krugman, "Chinese New Year," www.nytimes.com, December 31, 2009.