China, the mighty economy boasts of a $200 bn trade-dominant current account surplus along with $300-bn FDI with the status quo of cheap exports. As the dragon crawls toward freeing its giant economy from state control, the government at Beijing has closely held its currency, the Yuan (or Renminbi, RMB), at a relatively weak exchange rate. China is one of the few nations which still maintains a government-fixed rate and capital controls. Since 1994, Chinese currency has been pegged to the US dollar (the narrow band of 8.276-8.28) with the Chinese Central Bank intervention and appreciated around 5% only. The rate was held throughout the turmoil of the 1997-98 Asian financial crisis. The actual exchange rate is 8.28 yuan, implying that the Chinese currency is undervalued by 56% against the dollar. This has helped to keep China's exports relatively cheap. (A weaker currency means a country's goods are cheaper abroad, boosting exports). The global concern has risen recently, claiming that China's currency is vastly undervalued as the exports flow from the `factory of the world' into markets everywhere.
However, China is up against criticism. Going by this, on the currency policy issue, the mighty economy is stuck between a rock and a hard spot. The dragon is under increasing pressure to abandon its currency pegged to the dollar and float the yuan. In the recent past, the global media was repeatedly pointing out that China's rapid accumulation of international reserves reflected a growing external imbalance. The strong yuan is argued on putting the global economic recovery at risk. However, inflows of `hot money' into mainland have recently forced the Central Bank to buy an average of $600 mn (£422 mn) a day to keep the currency steady against the dollar. This pushed China's foreign exchange reserves above $340 bn by the end of June 2003 from $316 bn at the end of March 2003. Many voiced this surge as undervaluation of the currency.
Alan Greenspan, Chairman of the US Federal Reserve, added his opinion to those suggesting that China should float its currency. "It has required them to... be very heavy purchasers of US dollar-denominated assets," says Alan Greenspan. "At some point they will no longer be able to do that, because it will create an inability of their monetary system to function well." He further says, China could not continue to peg its currency without endangering its domestic economy. |
