The Yuan under the pressure of the International Community Should we revaluate the Yuan?

Résumé du document

In three decades, China has transformed from an economy based upon agriculture (low effective and auto centered) to an economy based upon mass industry and export. The wish of Xiaoping to open the country is completely reached (on an economy level) but his wish to develop China from the inside by allowing Chinese to have an access to a better situation is not yet achieved. Exports overpass imports, and that is the reason why China is a beneficiary today, but the internal consumption is still low if we compare to the potential of 1 350 million inhabitants. So, even if the GDP is growing fast, the 2009 GDP per people was still weak (about 2000$/inhabitant). China has been quite clever in its plan to develop, by working on a first time on its workforce (and competitive advantage) to create richness. But it has to be followed by another productivity source, by developing technologies. The economy is focused on exports and the Chinese developed a monetary policy in accordance with that. They expect to have important growth results, and so need a strong trade surplus. The two options available are working on the volume and the currency's margins, in order to sell a lot with as much gain as possible. So, they developed a specific monetary strategy by keeping the Yuan RMB out of the global speculations and fluctuations (as a fixed currency). In the same time, the Yuan tries to keep low exchange rate to boost exports thanks to a strong price competition and through wide margins. For instance, in 2000, you needed 8.277 RMB to get 1 dollar, but it was hard to keep such an advantage because trade partners like the USA, wanted to vigorously review the monetary policy (against an establishment of a 22,7% tax on Chinese product). On July 25, 2005, China accepted and appreciated the Yuan at 21% of what represent 8,11 RMB for one dollar. Another advance was done on the system of rating, by deciding to set up a floating logic at +/- 0.3% per day based on a currency basket (95% of dollar, Yen, Won). But this step is didn't calm down the asking for a strong revaluation. Behind this topic, we can see a conflict between the power of the USA and the desire of power from China, which marks its territory by indicating that no country can decide what China has to do. Since then, the RMB has slightly appreciated to 8.005 RMB per U.S dollar in early May 2006 (i.e. depreciation rate of 2% per annum). In 2010, the Yuan was at a level of 6,83 RMB for one dollar, and tried to find an answer into the crisis and the lost of value from the dollar, against other currencies. Main trade partners like the USA, Europe and Japan, call for a revaluation of the Yuan. They accuse China of dumping to boost exports, and to be responsible for imbalances in those countries. The USA highlights the responsibility of China about its huge trade deficit, and even about destructions of jobs on its soil etc. The Chinese government tries to defend itself by saying that there will be no appreciation and disagreed with the arguments. The problem doesn't stay in the nations' net, but finds an incredible interest into the world of economists, and financial experts. We will join their questioning during this dissertation, while trying to answer to the problem: Should we revaluate the Yuan?

Extraits

[...] He wished he could stop the poverty circle and give an access to a better situation for his people, and youthfulness. That's why he designed four big waves of reforms to set up new bases, new way of thinking and an opening economy. But be careful, we have to understand they didn't want to install a capitalistic policy but a communism more open, international and allowing people to find sources of money rather than exploiting poverty. Or at least, it was the hope. [...]

[...] We have to understand that this international interest is difficult to handle, because it melts conflict of interests from each country, ideologies, cultures and consequences of an appreciation for the concerning countries. So, it is hard to mystify a theory in particular, because the whole work, with the different focuses give an overall draw of the situation. So, thanks to the Literature Review and the enumeration of it, I have been able to find my own answer to the question: Should we revaluate the Yuan RMB? [...]

[...] These two economists designed a table where they show official Chinese figures for GDP, and "real" GDP calculated on an international model (way used by other countries to calculate their own GDP): From: Thomas Masson We can easily see that before 2005, the manipulation was directed in order to minimize the GDP, and so the national demand for better salaries for example. But after 1995, the official GDP is higher than reality to be able to show a gorgeous rate of growth. Thomas G.Rawsky made a study of the Chinese national airlines transport, and found that in 1999 the annual growth was about for an official increase of 6,3%. [...]

[...] It comes to counter-balance the firsts, and to notice that even if the majority of the economist community agrees with an undervalued Yuan, the topic stays difficult. Here we have two main theories going against the revaluation of the Yuan. The Economist brought in 2005 a new index, based upon the Starbuck coffee "Tall Late", and copying the method of the Big Mac index. In fact, this product is found in all continents and present the advantage to be worldwide, for good comparison. Moreover, the average price of a Tall Latte coffee, in the USA, is the same of the Big Mac, it means 2,80$. [...]

[...] Zhang, (2004), “Chinese Yuan (renminbi)”; Business & Economics Vincent Giret, (2005), Chine : Menaces sur le miracle économique ; Expansion Eric Leser, (21 février 2005), Le déséquilibre des échanges commerciaux avec la Chine provoque des tensions aux Etats-Unis ; Le Monde Aglietta M : La rivalité monétaire sino-américaine et l'hégémonie du dollar in La Chine, Les Cahiers du Cercle des économistes, 9. Bergsten, F : The US Trade Deficit and China Testimony before the Hearing on US-China Economic Relations Revisited Committee on Finance, United States Senate mars Goldstein M : Renminbi Controversies Institute for International Economics, Washington DC Chang, G. Hsin and Shao, Qin 2004. much is the Chinese currency undervalued? [...]