Some foreign critics, especially in the United States, have claimed that China has manipulated the value of its currency, keeping the yuan at an artificially low rate and not allowing proper market functions to operate.

The valuation of the Chinese yuan (or renminbi) has become a highly sensitive and politicized issue between China and the United States and, perhaps less pointedly, between China and the European Union. Since China’s entry into the World Trade Organization in 2001, China has run increasingly large trade surpluses with both of these trading partners. The prominence (and symbolism) of these deficits has become something of a battleground between those who believe the prominence represents a deliberate policy to distort and control world trade patterns in China’s favor and those who believe that the prominence is a natural outcome of globalization, and that to argue against China embracing this prominence, after so many years when it was criticized for holding itself apart, seems contradictory.

Criticism of the potential manipulation began to surface in the late 1990s, but with the accrual of massive amounts of foreign reserves by the Chinese central bank from 2001 onward, these criticisms became more focused and politically problematic. In early 2006 China overtook Japan as the holder of the world’s largest foreign exchanges. It had achieved this ranking through almost twenty-five years of exports and over $700 billion of foreign investment coming into China. Becoming one of the world’s most open economies was achieved while the central government still maintained two important levers of economic control. It maintained the nonconvertibility of the Chinese currency, and it exercised, largely through the State Administration for Foreign Exchange (SAFE), tight controls over capital outflows. Those purchasing goods in China (Wal-Mart or Tesco, for instance) for export to overseas markets had to pay in dollars, euros, or another convertible currency, and this money went into the central bank. The supplier was finally paid in local currency. Those Chinese companies that wished to invest or purchase abroad had to apply to the Bank of China—or, for large amounts, SAFE—for foreign currency to do this. There is, therefore, a wall between Chinese currency and foreign currencies. The Chinese government defends this wall by pointing out that without it the Asian economic crisis in 1998 would have ravaged the Chinese economy as much as those of Indonesia and Malaysia.

The value of Chinese yuan and the U.S. dollar have been pegged for a number of years, although partly because of U.S. pressure and partly because of China’s entry into the World Trade Organization and increasing internationalization of the Chinese economy, the exchange rate has been given some room to move within a tightly regulated value range. As the trade deficit with the United States in particular increased dramatically, particularly after 2003, there were complaints among U.S. policymakers and manufacturers that the Chinese yuan was being held at an artificially low rate and that the Chinese government was not allowing proper market functions to operate. The claimed degree of undervaluation varied from 15 percent to 40 percent.

An undervalued Chinese yuan would give Chinese manufacturers an unfair advantage because it would mean that they were able to export their goods at a much cheaper price than local producers in the destination country. But proving that currency manipulation has been going on has proved difficult. The Economist magazine has introduced the “Big Mac” measure by which the local price of a Big Mac hamburger is used as the benchmark across different kinds of economies and other goods compared with it. On this measure Chinese goods have been claimed to be 20 to 30 percent below value over most of the last twenty years. Even so, this measure has been criticized as crude.

In fact, complex reasons exist for the increase in Chinese exports abroad, some of them internal, some of them external. And although currency values might be an easy target, the story is not so straightforward. China has generally controlled the factors of production (the factors that contribute to the making of goods, such as electricity, labor, land for factories, human labor costs) strictly in the last quarter of a century. In that sense, China has subsidized the costs of manufacturing, starting to introduce a proper free market similar to ones that exist in developed economies only in the last few years. The costs of borrowing capital and employing people have been kept artificially low until recently. The Chinese government argued that it did this in order to help China build up capacity in a hugely competitive and complex international market. Although some analysts say that the most important advantage China has had in its ascent to becoming the “world’s factory” has been cheap and plentiful labor, this was one among several advantages.

A further contributing factor has been the extreme liberalization of foreign investment regulations into China, meaning that manufacturing in particular has benefited from the opening up of hundreds of thousands of joint ventures and the creation, particularly in south China around the Pearl River delta, of a massive manufacturing and industrial area. China has become such a large and successful exporter because of the benefits it has offered to foreign investors. Its export success, therefore, has also led to advantages and help for foreign partners.

Unique among major economic powers, China maintains this control over its currency But this means that, especially in a period of economic downturn, it remains a lightning rod for foreign critics and for those who see protectionism as a valid response to international trade competition. This issue is likely to remain as long as China continues with this macroeconomic measure. The real reasons for the deficits, however, are far more complex and would remain in place even were the Chinese yuan to be revalued.

Further Reading

Hale, D. H., & Hughes Hale, L. (January/February 2008). Reconsidering revaluation: The wrong way to the US China trade imbalance. Foreign Affairs. Retrieved February 19, 2009,

Yang, Jiawen, & Bajeaux-Besnainou, I. (2006). Is the Chinese currency undervalued?. International Research Journal in Finance and Economics, 2.

Source: Brown, Kerry. (2009). Currency Valuation. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 550–551. Great Barrington, MA: Berkshire Publishing.

Currency Valuation (Huòbì jiàgé ????)|Huòbì jiàgé ???? (Currency Valuation)

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