An Australian Perspective
Edited by Mohamed Ariff, John H. Farrar and Ahmed M. Khalid
Chapter 3: Exchange Rate Changes and Global Trade Imbalances: China as a Major Creditor Country
Ronald I. MacKinnon 3.1 PRELUDE In the decade of 2000–2010, the US dollar experienced a volatile period. Up to mid-2008, the dollar depreciated significantly against most major currencies while the renminbi (RMB) or the yuan was fixed at 8.28 yuan per dollar: it has been fixed since 1995. Nevertheless, after 2000, net saving in China began to increase while net saving, both private and government, in the US declined sharply. Unsurprisingly, this led to a large bilateral trade surplus of China (and with many other countries) trading with the United States. In the United States, this saving imbalance between the two countries was misinterpreted by many economists and politicians to be the result of a misaligned exchange rate. The rhetoric was that the renminbi was undervalued and led to what was popularly called China-bashing in order to prompt Congress action to appreciate the RMB. Eventually the People’s Bank of China (PBC) gave in to American protectionist threats to impose tariffs on imports from China. In July 2005, China began to slowly appreciate the currency against the dollar at about 6 per cent per year. This oneway bet, following this policy change that the RMB will be higher in the future, led to a deluge of hot money inflows and an explosion in Chinese foreign exchange reserves resulting in inflation and a threatened loss of internal monetary control. China’s trade surplus also kept increasing at about US$800 billion a year, which added to the perception that the two issues...
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