International economic relations present considerable challenges for people that try to understand and analyze them. The controversy of these relations is increased by the foreign exchange rates that are different for every particular pair of currencies. The world just starts to recover from the global economic recession, although some countries like the Eastern European and Asian ones still, and the effects of this crisis are observed from time to time in international trade relations. Currently, one of the most interesting issues of this kind is the position of the Renminbi about other currencies, and especially the U.S. dollar and Euro. The USA and EU demand that China should appreciate its currency, while the Chinese officials stick to the opposite point of view. So, is Renminbi too low? This paper tries to find answers.
The review of relevant scholarly literature can be of great help in answering the title question of this paper. Theoretical considerations by scholars like Begg, Dornbusch, and Fisher (2008) or McAleese (2004) are supposed to allow understanding the implications of exchange rates for international trade. Drawing from this, it will probably become possible to define whether the Renminbi is too low or its exchange rate reflects the actual picture of the economic position of the People’s Republic of China in the world. This is even more important in the light of the fact that, according to Sloman and Hinde (2006), the Chinese currency has been pegged to the group of foreign currencies since 2005 (Sloman and Hinde, 2006, Chapter 7), which makes the exchange rate of Renminbi crucially important for exchange rate fluctuations and trade transactions’ outcomes for such countries as the USA, the EU member countries, UK, etc.
Thus, discussing the importance of foreign exchange rates for international trade relations, Begg, Dornbusch, and Fisher (2008) and Griffiths and Wall (2004) attribute great importance to the notion of hedging (Griffiths and Wall, 2004, p. 528). The point here is that transactions carried out in two different currencies are often subjected to exchange rate fluctuations and drastic changes. Hedging, as Griffiths and Wall (2004) argue, allows companies to protect themselves from those fluctuation risks, buy the necessary currency on the day of transaction conclusion, and carry out the due payments without adjusting to the rates of the day. The Chinese policy regarding Renminbi rates does not allow the partners of China to use hedging as China is an exporter and it usually receives payments in the currency of the buying country.
The economic implications of such policies exercised by China can be easily considered through the prism of the views by McAleese (2004), who argues that the changes in foreign exchange rates are beneficial at the first hand for the parties that receive payments in the higher-valued currencies (McAleese, 2004, p. 531). The point here is that the exporter, when international trade is concerned, counts its benefits in the national currency, while the importer pays in its national currency respectively. This means that the lower the exchange rate of the Renminbi is, the more China earns in its international trade transactions.
Further on, other countries also experience the effects of the low Renminbi exchange rate when international trade is concerned (Sloman and Hinde, 2006, Chapter 7). For example, the USA faces a decrease in its international trade income caused by the low Renminbi value because China is one of the largest trade partners of the USA. Moreover, the devaluation of the dollar gave an international trade advantage to this country, but the lower Renminbi exchange rate deprives the USA of this advantage. Moreover, other countries also experience similar international trade problems, mainly because China is an exporting country in which production is cheap, while production rates are substantial. At the same time, when China imports steel or concrete from abroad, it can use the technique of monetary base expansion to cope with the increasing need of the Renminbi to pay for imported goods (Sloman and Hinde, 2006, Chapter 7).
Accordingly, the exchange rate of the Renminbi, which is too low, if the actual state of the Chinese economy today is considered, has mainly negative implications on international trade. First, the majority of countries participating in international trade suffer losses from the Renminbi low rate. Second, such a situation causes tension and makes countries like the USA implement additional taxes and sanctions against Chinese goods. Finally, countries other than China and the USA also have to take a position in this controversy, and this fact causes additional, this time ethical, problems in modern international trade.
So, the conclusion of the whole above discussion is that the current exchange rate for the Renminbi is too low, or at least lower than it could be based on adequately assessed economic conditions in the world trade. However, from the economic point of view, China has reasons to keep the Renminbi exchange rate so low, as it allows it to increase its foreign trade benefits and invest more funds into the domestic industrial and agricultural development. Although the USA introduces new and new sanctions against China, the latter seems to benefit from its policies, even more, when the current construction boom results in the goods demand boom in several years.
Begg, D., Dornbusch, R., and Fisher, S. (2008) Economics, 9th Ed., McGraw Hill Higher Education.
Griffiths, A. and Wall, S. (2004) Applied Economics, 10th Ed., Financial Times / Prentice Hall.
McAleese, D. (2004) Economics for Business: Competition, Macro-Stability and Globalisation, 3rd Ed., Financial Times/ Prentice Hall.
Sloman, J. and Hinde, K. (2006) Economics for Business, 4th Ed., Financial Times/ Prentice Hall. Website: www.pearsoned.co.uk/sloman