Chlna's Currency uevaluaLlon and lLs

effecL on Lhe World Lconomy

@f
ackground
W Chlna's currency pollcy ls a ma[or facLor behlnd Lhe large
annual uS Lrade deflclLs wlLh Chlna and has lead Lo Lhe
wldespread loss of uS manufacLurlng [obs
W Chlna has largesL dollar forex reserve(Around 23 Lrllllon
dollar)
W Chlna's currency pollcy ls dlsrupLlve Lo global economlc
recovery because lL lnduces many counLrles Lo lnLervene ln
currency markeLs ln an efforL Lo hold down Lhe value of
Lhelr currencles agalnsL Lhe dollar ln order Lo enable Lhelr
flrms Lo remaln compeLlLlve vlsvls Chlnese flrms
W unLll 2003 Chlna wlLhheld uollar Lo ?uan
exchange raLe on 828
W AfLer 2003 unLll recesslon Chlna allowed
around 21 appreclaLlon ln ?uan value from
828 Lo 683
W ln recesslon perlod Chlna wlLhheld 683
exchange raLe
LffecLs on Lhe World Lconomy
W lL helps Chlnese producLs compeLe ln uS and
oLher markeLs
W Cheaper cosL Lo Chlnese company (Cheap
LxporL)
W PurLs world exporLs Lo Asla
W Lay offs ln uS flrms furLher causlng slow down
W Chlna ls already a manufacLurlng hub so
lf ?uan AppreclaLes
lmpacL on Chlna
W An lmmedlaLe and sharp appreclaLlon of Chlna's
currency could dlsrupL lLs exporL lndusLrles and lead Lo
wldespread layoffs whlch ln Lurn could slow lLs
economlc growLh and reduce lmporL demand
W Powever lf 8M appreclaLlon occurred along wlLh
measures Lo boosL domesLlc consumpLlon lald off
Chlnese workers ln Lhe exporL secLor would be able Lo
flnd [obs ln oLher (nonexporL) secLors whlch could
help malnLaln healLhy economlc growLh and boosL
Chlnese demand for lmporLs
And lLs lmpacL on uS
W Whlle an appreclaLlon of Lhe agalnsL Lhe dollar could
help boosL uS exporLs Lo Chlna lL could also enLall
cosLs Lo Lhe uS economy ln Lhe near Lerm Chlna
would noL need Lo buy as many uS 1reasury
securlLles whlch could cause real uS lnLeresL raLes Lo
rlse
W A more expenslve 8M could also mean hlgher cosLs
for uS consumers as well as flrms LhaL use Chlnese
made lnpuLs for Lhelr producLs 1o reduce uS exLernal
lmbalances (lncludlng wlLh Chlna) Lhe unlLed SLaLes
would need Lo boosL naLlonal savlng
lf lndla devaluaLes lLs currency
W lndla noL a manufacLurlng hub
W SofLware LxporLs are beneflLLed when 8upee
ls weak noL when 8upee ls sLrong
W lndlan l1 geLs money ln $ and has Lo pay ouL ln
8s
W lndla's exporL of l1 does noL have compeLlLlon
(lf compared Lo Chlnese slLuaLlon)
W ll lndla devaluaLes lLs currency Lhe cosL of
lmporLs wlll lncrease
W 1he cosL of servlclng Lhe forelgn debLs wlll go
up
W 8eference Chlna's Currency An Analysls of
Lhe Lconomlc lssues
hLLp//wwwfasorg/sgp/crs/row/8S21623pdf