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Thursday 24 Aug 2017 | 17:24 | SYDNEY
Thursday 24 Aug 2017 | 17:24 | SYDNEY

More on China's exchange rate



18 March 2010 15:34

If Clinton Dines is right that a revaluation of the RMB will only benefit China, why is Beijing maintaining its undervalued exchange rate? 

After all, as Clinton rightly points out, one obvious consequence of the current policy is that China has to effectively overpay both for imports and for purchases of foreign assets. Perhaps Beijing is just being dumb. Or perhaps there are some significant economic benefits arising from its current exchange rate policy. I know which of these my money is on.

Clinton also draws attention to the high level of foreign value added in China's exports to argue that a revaluation would actually increase China's export competitiveness. Well, no, it wouldn't. What it does mean is that the impact of any given revaluation will be muted.

For example, this study by the US CBO suggests that the average domestic value added of Chinese exports to the US is probably between 35% and 55%. That means a 20% revaluation of the RMB (roughly the mid-point of the estimates of current RMB undervaluation) would only cause the average price of US imports from China to rise by roughly 7%-11%, assuming that Chinese exporters fully passed through all their costs and previous profit rates. 

Since in practice those exporters may well decide to reduce their margins to maintain market share, the increase in prices would probably be even lower, and the impact on trade flows even more subdued.

A couple of caveats. First, the studies cited by the CBO report are based on fairly old data, and it's quite possible that the domestic content of Chinese exports is now higher than these estimates suggest. Second, it's often argued that China's reluctance to revalue its exchange rate means that other Asian economies are also unwilling to allow their currencies to appreciate as much as they otherwise would. If that's right, then a RMB revaluation might also occur in conjunction with an appreciation in other regional currencies. This could increase the price of inputs to Chinese producers.

Photo by Flickr user jimmiehomeschoolmom, used under a Creative Commons license.

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