Edited by Koichi Hamada, Beate Reszat and Ulrich Volz
Chapter 13: The Illusion of Precision and the Role of the Renminbi in Regional Integration
Yin-Wong Cheung, Menzie D. Chinn, and Eiji Fujii1 13.1 INTRODUCTION On July 21, 2005, China announced a long-anticipated revision to its exchange rate regime.2 Against a backdrop of rising protectionist sentiment in the United States and increasingly acrimonious mutual recriminations over the benefits and costs of an open international financial system, the move was warmly, albeit cautiously, welcomed. The wariness arises from the uncertainty surrounding the exact nature of the new exchange rate regime and how rapidly the Chinese authorities are willing to allow the currency, the renminbi (RMB), to appreciate. So far, the increase in the RMB’s value against the dollar has been quite modest—in the order of a few percentage points. The intensity of the debate regarding the degree of RMB misalignment reflects the increasing role of China in the international arena and its rapid pace of export growth and penetration into global markets. Much of the pressure for RMB revaluation is driven by China’s rapidly growing trade surplus with the US (and more recently with the rest of the world) and its accumulation of foreign reserves. On the other hand, China’s domestic problems and its role in the regional production process have received limited attention in the debate. While the theme of the current study is not to evaluate arguments advanced for RMB revaluation, it should be noted that China’s external balances have not—until quite recently—constituted a prima facie case for RMB undervaluation. Economic theory, for instance, suggests that the RMB value should be...
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