Is the renminbi really undervalued?

The Fed, the IMF and Governments all over the world say, that the Chinese Currency is undervalued. On the other side, there are people who don’t agree to that. What should we believe?

Jim O’Neill (head of global economic research and commodities and strategy research at Goldman Sachs) states that there is no undervaluation of the Renminbi compared to the US Dollar.

In fact, looking at chart 1, which shows the development of the exchange rate during the last five years, one can clearly see that the Renminbi rose compared to the US Dollar. And even in the last 3 months, where China was accused of manipulating their currency, the exchange rate did not fall or change very much at all (Chart 2).

Furthermore, he mentions that China’s imports rise by around 400 billion US$ per year and argues that even with a falling Dollar over the last couple of years the American trade deficit got bigger and bigger.

On the other hand, Mr. Bernanke (Chairman of the Federal Reserve) strongly criticizes China’s currency policy as “eventually inhibit[ing] growth around the world and risk[ing] financial instability at home.” Being of the same opinion as Mr. Bernanke, Mr. Dominique Strauss-Kahn (IMF Managing Director) states that the Chinese currency is substantially undervalued, but adds that other countries should not use this as an excuse to “postpone structural reforms that would restore competitiveness” [Reuters, 06/10/2010]

Which statement is true? In my opinion, the truth is somewhere in the middle. Fact is that in the current situation of the world economy every country somehow tries to protect their own economy, as all politicians are measured by the situation in their own country. Unemployment rises and government debts are huge, so every country tries to get back on track as fast as possible. The easiest way of earning more money is by exporting goods into other countries and a lower currency rate enhances those exports.

I will be happy to read your thoughts on that.

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3 Responses to Is the renminbi really undervalued?

  1. bravenewloock says:

    Unfortunately, this really seems to be the current situation. However, as we blogged about before, “the easiest way of earning more money is by exporting goods into other countries” is in my opinion a very shortlived strategy, as only a global restauration of trust and effective and fair monetary markets can spur a renewed growth in all countries!

  2. rudi2020 says:

    Its a bit tricky to make up one’s own mind, especially on this topic on basis of what one is told. Both sides US and Chinese are leaving some credible arguments. Give this one a try: Obama on China pretty much objecting stuerzele’s reasoning.

    From what I gathered so far I agree to stuerzele saying middle way is best.

  3. It is quite remarking what Strauss-Kahn said. It can be seen as a strong argument because the previous months give the clear impression that lots of economies have found a scapegoat in China’s exhange rate policy – but at the same time, they are not trying to seek for a solution on their own side as to overcome the economic problems which may result from this policy. It is clear warning to all nations and It can be said that markets do not receive such a message often enough.

    By the way, China is definitely not the only nation which intervenes into exchange rate movements. Have a look at the exchange rate between EURO and Swiss franc. The Swiss National Bank SNB used to intervene until recently. They wanted to make sure that its economy is stabilizing and not prone of deflation:
    none

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