Political Economy Of Yuan Dollar Exchange Rate

2266 words - 9 pages

  The Chinese exchange rate policy has been one of the top topics of debate in recent years. It has attracted a great deal of attention in academic and policy area due to the slower pace of economic growth and manufacturing job creation from the beginning of 21st century and recent financial crisis in United States. China has been accused of pursuing new mercantilist policy, that is, encouraging export and impeding import mainly through the manipulation of exchange rate between Chinese currency known as Renminbi and US dollar. China was maintaining its currency strongly pegged with US dollar from 1994. Some recognised economists and policy makers are repeatedly blaming the Chines exchange rate policy for the prolong financial crisis and sluggish recovery where as some other prominent economists provide the different opinions.

  The debate on Chinese exchange rate policy started from the East Asian crisis in 1997. But it has been intensified only after the publication of some articles on economic newspaper in western world (Financial Times) and in Japan (Nihon Keizai Shinbun). Afterwards, government officials of USA and Japan on many occasions urged and pressurized the Chinese authority to allow more flexibility for the movement in the Chinese exchange rate. In G7 meeting of 2002, the Japanese Finance Minister Masajuro Shiokawa raised the concern over the manipulation of currency exchange rate by China, and asked the G7 community to jointly put pressure on the China to appreciate its currency so as to combat global deflation. The then US President George W. Bush and Sectary of Treasury John W. Snow also touched this issue during the different meetings with different Chinese high officials on various occasion in 2003. In early 2005, G7 countries, without mentioning the name of China, "stressed the need for greater exchange rate flexibility by countries whose currencies had not been floated ((Kanamori and Zhao, 2006)." The Financial Times reported on 17 April 2005 that the G7 agreed to call on the China to take immediate action to shift to a more flexible exchange rate regime.
  
  On the part of china it is repeatedly emphasized that the Chinese currency policy is not meant to manipulate the international trade, rather it is for the overall stability of the Chinese economy. The Chinese authorities expressed their concern that allowing more volatility in currency would damage the export industry as other economic reforms were going on in China such as closing down the inefficient public enterprises. They feared that the Chinese banking system is so underdeveloped and burdened with heavy debt that it would not be able to deal effectively with possible speculative pressures that could occur under more flexible exchange rate regime (Morrison and Labonte, 2009). Further more, Chinese authorities stressed that the any economic instability would result in unemployment that could spur political unrest un the country. However, The Chinese authorities...

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