Will China revalue its currencyCauses of devaluation Mechanisms Implications - Essay Example

?Running Head: ABBREVIATED OF YOUR CHOICE (all caps) and Section # of Will China Revalue its Currency Introduction China has revalued its currency at many occasions since the beginning of economic reforms in 1979. It follows the laws of the fixed exchange regime where the currency is devalued and revalued at will. For years, China maintained a fixed exchange rate; allowing to appreciate at its will. It has, now and again, manipulated its currency to gain a competitive advantage in the global trade market; and it has allowed China to maintain supreme dominance over the world markets. Nonetheless, the country has been facing immense pressure since a decade to float the currency in the open market and allow the currency to appreciate to a free rate. China did allow appreciation for a while, but at a gradual pace with interruptions. (Murphy 2009) The world continues to ask: will China revalue its currency? The essay will provide justifications for both sides; it will provide the reasons behind the devaluation, the mechanisms used as well as implications on an undervalued Yuan. The essay will end with a strong conclusion followed by recommendations. At present, economists believe that the Chinese currency is still undervalued by 15 to 20 percent. They opine that the revaluation will benefit the global economies and help reduce the increasing trade deficits. However, the Chinese politicians believe that the revaluation will hurt their economy and growth; as well as their political control. (Johnson 2013) Causes of Devaluation In the domestic sphere, analysts, in the Chinese circle, believe that revaluation will make their exports expensive compared to today. This consequential drop in Chinese exports will lead to several immediate factory shutdowns; while many others will shift to the low wage economies such as Vietnam and Sri Lanka. (Johnson 2010) This will upset the economy as a whole especially the working class. The resulting unemployed from the layoffs and shutdowns in the remote areas will not easily be absorbed into the economy. This will create anti government sentiments and result in isolated mass incidents around China. (Johnson 2010) “Any significant appreciation of the renminbi will erode China’s export competitiveness overnight and impact the livelihood of tens of millions of workers1,” states an editor at China Daily media agency. Likewise, Chinese politicians strongly believe that the currency reforms, pushed by the US and other global powers, are only means to slowdown its economy and contain growing Chinese power. These politicians refer to similar US policies towards Japan in 1980s. Japan stills reels from the effects of the real estate bubble burst caused by the forced US policies. Therefore, the Chinese are eager not to repeat the same episode. (Lee 2010) (Murphy 2009) Similarly, China thinks alike all the economic powers of the world. It first thinks about the domestic affairs especially employment figures before working towards rebalancing of the macroeconomic indicators around the world. In the aftermath of the financial crisis 2008, the Chinese lost 20 to 40 million jobs related to the export oriented industries. This forced Chinese to put an to the revaluation thoughts for some time. (Lee 2010) A research conducted by the Chinese authorities on the streets showed that a percent appreciation in the value of Yuan will lead to a percent decline in the tiny profit margins of the small export oriented companies. Economists opine that an undervalue Yuan is critical for sustaining the Chinese growth; therefore, all the intimidating by the world leaders will not change the Chinese policy. Revaluation will benefit China in the Long Run Other economists believe that the revaluation of Yuan will benefit China in the long run. It will do more good than harm. Economists know that, at present, the Chinese economy is heavily depending on exports and fixed investment; and not on the local consumption. It must revalue its currency to make the imports cheaper and augment the local consumption. The economy must move its dependency from the exports to the local consumption for sustainability. (Stephen 2013) (Lee 2010) United States Point of View The currency war has been a point of contention between the two countries for more than a decade. United States considers the undervalued Yuan as the main cause of high unemployment rate in the country, because many manufacturing firms have move to China due to lower wages. Likewise, it has created a huge trade deficit with China which depletes the foreign reserves at a faster pace. United States argues that the devalued Yuan provide China with an unfair competitive advantage in the global market; whereas China states that the currency management is an internal affair of the state. (Murphy 2009) U.S. Treasury Secretary Timothy F. Geithner argues that China needs to strengthen its currency by revaluation. It must allow for a level playing ground, because the peg puts the Yuan at a completive advantage. He states, ““China presents enormous economic opportunities for the United States and for the world, but its size, the speed of its ascent, and its policies are a growing source of concern in the United States and in many other countries2.” Mechanisms In a fixed exchange regime, a country devalues or revalues its currency based on the suggestions of the policy makers. China, following a fixed exchange regime, intervenes in the markets to check the exchange rate and to keep it fixed at a particular rate. Under immense pressure from the global world, especially the United States, Chine reformulated its currency policy in 2005 and allowed Yuan to appreciate in the world market. However, following the financial crisis around the world, China again intervened to devalue its currency to protect its industries and employment. China was under immense pressure to revalue Yuan; in 2010 China let the currency appreciate but at a slower rate. Implications United States opines that the undervalued Yuan has been a concern for the global world to a great extent. It considers this devalued Yuan to be responsible for the huge trade deficits with China as well as for the high unemployment rate in the country. The undervalued Yuan supports those firms that use Chinese imported products; but impacts negatively on those that compete with the Chinese products. It also limits the foreign imports from around the world into China. (Morrison, 2012) Nonetheless, the appreciation of Yuan against the dollar has decreased the foreign reserves and the current account balance of China. It has made the Chinese products more expensive as compared to yester years. Conclusion China will not revalue its Yuan in foreseeable future; all the promises to the world are bare words with no hopes of implementation. Chinese leaders believe that they need to maintain the export oriented economy to sustain the growth rate. This will allow the political party to maintain its control over China as well. Likewise, the boom will allow the country to keep the unemployment rate low while maintaining a check on social unrest. Recommendations China needs to start to revalue its currency at a gradual place. Its needs to shift from an economy based on exports to an economy based on local consumption. The gradual pace will allow the local export oriented companies to restructure and upgrade them. The revaluation will, in turn, mitigate the effects of inflation and increase the purchasing power parity of the common man. China will need to address the concerns of the global trade market and will need to revalue the currency, before they start to impose trade restrictions and other barriers on the Chinese goods. Works Cited Murphy, Melissa and Wen Jin Yuan. Is China ready to challenge the dollar?. Washington, DC: CSIS Press, 2009. Bloomberg. "Yuan Revaluation Is Win-Win for China-U.S.: Lee Hsien Loong." 2011. http://www.bloomberg.com/news/2011-01-04/yuan-revaluation-is-a-win-win-for-china-u-s-lee-hsien-loong.html (accessed 4 Nov 2013). Johnson, Simon. "Why China Is Unwilling to Revalue the Yuan." 2013. http://baselinescenario.com/2010/10/01/why-china-is-unwilling-to-revalue-the-yuan/ (accessed 4 Nov 2013). Katz, Ian. "Geithner Says China Must Boost ‘Undervalued’ Yuan." 2013. http://www.bloomberg.com/news/2011-01-12/geithner-says-china-must-move-to-prop-up-substantially-undervalued-yuan.html (accessed 4 Nov 2013). Lee, John. "China Won't Revalue the Yuan." 2010. http://www.foreignpolicy.com/articles/2010/09/24/china_won_t_revalue_the_yuan (accessed 4 Nov 2013). Stephen, Craig. "Is yuan devaluation the real ‘Li Keqiang put’? Craig Stephen's This Week in China." 2013. http://www.marketwatch.com/story/is-yuan-devaluation-the-real-li-keqiang-put-2013-07-29 (accessed 4 Nov 2013). The Economist. "The cheapest thing going is gone." 2013. http://www.economist.com/news/china/21579488-after-enduring-decade-criticism-its-weakness-chinas-currency-now-looks-uncomfortably (accessed 4 Nov 2013). Read More