Macroeconomics Case Study

Renminbi Revaluation: Does Chinese Economy Need It?

OR

Abstract:
Since its economic reforms, China had followed a pegged exchange rate regime as an incentive to its exporters. However, in July 2005, China, under immense international pressure resorted to a policy of managed float. Since then its currency had appreciated by almost 16% against the US dollar. However some economists are of the opinion that the appreciation is marginal and it will only aggravate China's economic problems. China is already suffering from a weak financial system, expansionary credit policy and a rising inflation rate. A major appreciation in the Chinese exchange rate can only help China to come out of these problems. However, there is a separate school of thought saying that a major appreciation in Chinese currency can drag China to a liquidity trap situation, as was the case in Japan in the late 1980s and 1990s. The case discusses the various issues related to the managed float policy in China. It also discusses the economic effect of a sudden appreciation of the Chinese currency on China.

Pedagogical Objectives:

• To discuss China's pegged currency policy since its reform.
• To analyse the causes that led China to follow a managed float exchange rate policy.
• To discuss whether the managed float policy is good for the Chinese economy.
• To find out whether free float is a possible option for China.

Keywords :  Pegged currency policy, Managed float, Expansionary credit policy, Overheated economy, Sterilisation, Monetary tightening, Free capital mobility, Liquidity trap, Renminbi revaluation, Fiscal tightening, Renminbi appreciation, Fixed exchange rate regime, Credit overshooting, Chinese banking system, Overcapacity