the controversy over the revaluation and exchange rate regime of the chinese currency...

The Controversy over the Revaluation and ExchangThe Controversy over the Revaluation and Exchange Rate Regime of the Chinese Currency e Rate Regime of the Chinese Currency

人民币均衡汇率的争议和调整方案的选择人民币均衡汇率的争议和调整方案的选择 Gene H Chang ( 张欣 )

University of Toledo, U.S.A. ( 美国托列多大学 ) 经济学教授、亚洲研究所主任

[email protected]

©

Gene Chang, June 2005Gene Chang, June 2005

The U.S. CongressThe U.S. Congress

Senate Bill: Senate Bill:

by Charles Schumer (D., N.Y.) and Lindsey Graby Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.)ham (R., S.C.)

Currency manipulation by China.Currency manipulation by China.

If no RMB revaluation, imports from China can bIf no RMB revaluation, imports from China can be subject to 27.5% tariff. e subject to 27.5% tariff.

Vote by July. Vote by July.


The U.S. CongressThe U.S. Congress

House China Currency Act: House China Currency Act:

by Congressmen Duncan Hunter (R., Calif.) and Tim Ryby Congressmen Duncan Hunter (R., Calif.) and Tim Ryan (D., Ohio)an (D., Ohio)

Currency manipulation as a "prohibited export subsidy" bCurrency manipulation as a "prohibited export subsidy" by China, under Article VI of the GATT.y China, under Article VI of the GATT.

If no RMB revaluation, trigger an antidumping or counterIf no RMB revaluation, trigger an antidumping or countervailing duty. Prohibition of importation of Chinese defevailing duty. Prohibition of importation of Chinese defense productsnse products

PublicPublic

• Job loss• Close of many American companiesespecially, small companies


Selected Antidumping Actions Initiated by the Selected Antidumping Actions Initiated by the U.S. Against ChinaU.S. Against China

Date of Provisional Measure Dumped Imports Basis of

Product Initiation (Dumping Margin)as % Domestic Consumption

# of Firms charged Determination

Antidumping Actions by the U.S.

Car Windshield Glass 3/27/2001 .05-125% NA 2 firms NA

Folding metal Chairs and Tables 12/3/2001 0-134.77% NA 2 firms NA

Foundry Coke Products 03/18/01 76.19-214.89% NA 4 firms NME

Fresh Garlic (3 cases) 08/24/01 NA NA 7 firms NME

Freshwater Crawfish Tail Meat 26/12/01 7.23% NA 27 firms NME

Heavy Forged Hand Tools (3 cases) 11/07/00 0.00-98.77% NA 5 firma NME

Honey 08/02/01 22.05-67.44% NA 3 firms NME

Hot-rolled Steel Flat Products 05/01/01 64.20-90.83% NA 3 firms NME

Furniture 2003 28 firms

TV sets 2003 1 firm

Textile products 2005


Top trade partners of the U.S.Top trade partners of the U.S.(2004)(2004)

Total Trade Total Trade VolumeVolume

Trade DeficitTrade Deficit

11 CanadaCanada ChinaChina

22 MexicoMexico JapanJapan

33 ChinaChina CanadaCanada

44 JapanJapan MexicoMexico

55 GermanyGermany GermanyGermany


Discrepancy between Discrepancy between The U.S. and China StatisticsThe U.S. and China Statistics

CalculatedCalculated

by the U.S. by the U.S. customscustoms

Calculated by the Calculated by the Chinese customsChinese customs

20042004 161,977161,977 80,20080,200

20032003 123,960123,960 58,61358,613

20022002 103,115103,115 42,72042,720

Trade deficit with China (million$)Trade deficit with China (million$)


US Trade with China US Trade with China (million dollars)(million dollars)

0

50,000

100,000

150,000

200,000

250,000

TotalDeficit

The Bush administrationThe Bush administration-- ambivalence-- ambivalence

•2003: US Treasury Secretary John Snow told a House of Representatives panel. "China has pegged its currency to the dollar for 10 years. This administration has stressed that China needs to move to float its currency as soon as possible”

•The U.S. Treasury angered Congress by stopping short of issuing a formal finding that the Chinese government manipulated the exchange value of the yuan. It concluded that such a policy by itself does not meet the statutory definition of currency manipulation.

•May 26, 2005: The Bush administration stopped demanding that China let its currency, the yuan, float freely against other major currencies. "I don't think it is in our interest or in their interest in going immediately to a full float," Treasury Secretary John Snow told the Senate Banking Committee on Thursday. " Snow refused to say by how much he wanted China to revalue the yuan.

Federal Reserve:Federal Reserve:--- --- reservationreservation

•March 2005: Federal Reserve Chairman Alan Greenspan warned if China were to let its currency float immediately, as many in the US want, it could weaken that country’s banking system and threaten the world economy

•May 20, 2005 – Greenspan: “American shoppers will pay higher prices but the U.S. trade deficit with the rest of the world won't fall if China revalues its yuan currency as the Bush administration wants”.


Impacts on the U.S.Impacts on the U.S.

Reducing trade deficit Reducing trade deficit with Chinawith ChinaPreserving more jobs Preserving more jobs in the U.S.in the U.S.

Increasing trade deficit in terms Increasing trade deficit in terms of dollarsof dollarsSpeculative sell of dollarsSpeculative sell of dollarsPressure on the global dollar Pressure on the global dollar system, dollar and T bondssystem, dollar and T bondsU.S. bonds down, interest rate U.S. bonds down, interest rate upupWidening financial resource gapWidening financial resource gapInflationInflationDeterioration of terms of tradeDeterioration of terms of tradeConsumer surplus lossConsumer surplus loss

Pro Con


AcademicAcademic

Jeffrey Frankel: Yuan 42% undervaluedJeffrey Frankel: Yuan 42% undervalued

Lardy and Goldstein: 15%-25% Lardy and Goldstein: 15%-25% undervaluedundervalued

Gene Chang: 19.2% undervaluedGene Chang: 19.2% undervalued

Steve Hanke and Michael Connoly: No unSteve Hanke and Michael Connoly: No undervaluation dervaluation

Ronald McKinnonRonald McKinnon

Robert MundellRobert Mundell


Estimation of Equilibrium Value Estimation of Equilibrium Value of Yuanof Yuan

Determination in the short-runDetermination in the short-runDetermination in the long-runDetermination in the long-runPurchasing power parityPurchasing power parity

E = PE = PU.S.U.S. / P / PChinaChina

Relative purchasing power parityRelative purchasing power parity% depreciation in E% depreciation in E

= inflation U.S. – inflation China= inflation U.S. – inflation ChinaProblems with using relative PPP to estimate Problems with using relative PPP to estimate equilibrium value of yuanequilibrium value of yuan



Real Exchange Rate (RER)Real Exchange Rate (RER)

RER = (E X PRER = (E X PChinaChina) / P) / PU.S.U.S.

If absolute PPP holds, RER = 1If absolute PPP holds, RER = 1


Fig 1. Relative Pruchasing Power (RPP) of Currencies of Various Countries

-4

-2

0

2

4

6

8

10

0 10000 20000 30000 40000 50000

GDP per capita

Re

lati

ve

Pu

rch

as

ing

Po

we

r

RPP

Fitted line

Linear (Fitted line)



Why is RER greater than 1 for poor Why is RER greater than 1 for poor countries?countries?

The Balassa-Samuelson hypothesisThe Balassa-Samuelson hypothesis

The Bhagwati-Kravis-Lipsey hypothesisThe Bhagwati-Kravis-Lipsey hypothesis



Model with control of the income level:Model with control of the income level:

RER = f (GDP per capita)RER = f (GDP per capita)

Data for RERData for RER

Linear or log linearLinear or log linear

(ln) RER = a + b X (ln) GDP per (ln) RER = a + b X (ln) GDP per capitacapita

Control heteroskedasticityControl heteroskedasticity



Using the world sample to obtain the Using the world sample to obtain the estimates and the prediction equationestimates and the prediction equation

CoefficientsCoefficients Standard Standard errorerror

t -statisticst -statistics

InterceptIntercept 4.28039 4.28039 0.15922 0.15922 26.88387 26.88387

GDP p.c.GDP p.c. -0.13386 -0.13386 0.01320 0.01320 -10.14495 -10.14495


RMB exchange rateRMB exchange rate

0123456789

10

RER actual

Exchange rate (yuan per $)


RMB Undervaluation EstimationRMB Undervaluation Estimation

YearYear GDP pc GDP pc 20012001

RER RER actualactual

RER RER predictedpredicted

ValuationValuation P-valueP-value

19781978 703703 1.981.98 4.074.07 51.3%51.3% 0.0840.084

19851985 11581158 2.682.68 4.024.02 33.3%33.3% 0.1870.187

19861986 12931293 3.213.21 4.004.00 19.7%19.7% 0.2990.299

19871987 15091509 4.334.33 3.973.97 -8.9%-8.9% 0.4060.406

19911991 17571757 4.394.39 3.943.94 -11.2%-11.2% 0.3840.384

19941994 24842484 4.794.79 3.863.86 -24.3%-24.3% 0.2630.263

19951995 27882788 4.304.30 3.823.82 -12.6%-12.6% 0.3720.372

19961996 29872987 4.084.08 3.803.80 -7.4%-7.4% 0.4240.424


RMB Undervaluation EstimationRMB Undervaluation Estimation

YearYear GDP pc GDP pc 20012001

RER RER actualactual

RER RER predictedpredicted

ValuationValuation P-valueP-value

19971997 31453145 4.014.01 3.783.78 -6.1%-6.1% 0.4370.437

19981998 33083308 4.094.09 3.763.76 -8.9%-8.9% 0.4090.409

19991999 35223522 4.264.26 3.733.73 -14.3%-14.3% 0.3570.357

20002000 38293829 4.374.37 3.703.70 -18.4%-18.4% 0.3190.319

20012001 40204020 4.414.41 3.673.67 -20.1%-20.1% 0.3040.304

20022002 43094309 4.484.48 3.643.64 -23.2%-23.2% 0.2780.278

20032003 46184618 4.414.41 3.603.60 -22.5%-22.5% 0.2860.286

20042004 50245024 4.234.23 3.553.55 -19.2%-19.2% 0.3150.315


Under / Over –valued currenciesUnder / Over –valued currencies

-1.5

-1

-0.5

0

0.5

1

Kyr

gyz

Rep

ublic

Les

oth

oU

krai

neG

uya

naC

hina

Par

agu

ayG

eorg

iaT

urkm

enis

tan

Sri

Lan

kaM

oroc

coA

lban

ia

Syr

ian

Ara

b R

epu

blic

Gu

atem

ala

Fiji

Bol

ivia

Ecu

ado

r

St.

Vin

cen

t an

d th

e G

ren

adin

esJa

mai

ca


Should RMB be revalued?Should RMB be revalued?--- attitudes of --- attitudes of

The U.S. The U.S.

JapanJapan

European UnionEuropean Union

Rest of AsiaRest of Asia

Developing countriesDeveloping countries

China itselfChina itself


Asian countriesAsian countries

China is the largest export destination for China is the largest export destination for many Asian regions including Korea and many Asian regions including Korea and TaiwanTaiwan

China and Hong Kong imports more goods China and Hong Kong imports more goods from rest of Asia than Japanfrom rest of Asia than Japan

Concern over a floating RMB that may Concern over a floating RMB that may cause regional economic instability.cause regional economic instability.


ChinaChina

Reduce competitivenessReduce competitiveness

Adversely affect exportsAdversely affect exports

Adversely affect Adversely affect employmentemployment

DeflationDeflation

Improve terms of tradeImprove terms of trade

Reduces debt service Reduces debt service burdenburden

Reduces the cost of the Reduces the cost of the huge foreign reservehuge foreign reserve

Upgrading economic Upgrading economic structurestructure

ProCon


Choice of exchange rate regimeChoice of exchange rate regime--- Flexible--- Flexible

Free floating – the absence of regular Free floating – the absence of regular intervention in the foreign exchange intervention in the foreign exchange marketmarket

Managed float – the absence of a specific Managed float – the absence of a specific target for the exchange ratetarget for the exchange rate

Note: according to Frankel, Huang and othersNote: according to Frankel, Huang and others


Choice of exchange rate regimeChoice of exchange rate regime--- Intermediate--- Intermediate

Target zone, or band – a margin of fluctuation around soTarget zone, or band – a margin of fluctuation around some central rateme central rateBasket peg – fixing not to a single foreign currency but tBasket peg – fixing not to a single foreign currency but to a weighted average of other currencieso a weighted average of other currencies5. Crawling peg – a preannounced policy of devaluing a 5. Crawling peg – a preannounced policy of devaluing a bit each weekbit each week Adjustable peg – fixing the exchange rate, but without aAdjustable peg – fixing the exchange rate, but without any open-ended commitment to resist devaluation or revalny open-ended commitment to resist devaluation or revaluation in the presence of a large balance of payments deuation in the presence of a large balance of payments deficit or surplus ficit or surplus

Note: according to Frankel, Huang and othersNote: according to Frankel, Huang and others


Choice of exchange rate regimeChoice of exchange rate regime--- Fixed--- Fixed

Truly fixed peg – fixing, committing to buy or sell howevTruly fixed peg – fixing, committing to buy or sell however much foreign currency is necessary at a given exchaner much foreign currency is necessary at a given exchange rate, with a firm and lasting intention of maintaining thge rate, with a firm and lasting intention of maintaining the policy.e policy.Currency board – three defining characteristics: fixing nCurrency board – three defining characteristics: fixing not just by policy but by law, backing increases in the monot just by policy but by law, backing increases in the monetary base one-for-one with foreign exchange reserves, etary base one-for-one with foreign exchange reserves, and allowing balance of payments deficits to tighten monand allowing balance of payments deficits to tighten monetary policy and thereby adjust spending automaticallyetary policy and thereby adjust spending automaticallyMonetary union – the adoption of a foreign currency as lMonetary union – the adoption of a foreign currency as legal tender. This includes the special case of official dollegal tender. This includes the special case of official dollarizationarization


China: which choiceChina: which choice

Free floatingFree floating

The vulnerable monetary and banking The vulnerable monetary and banking system cannot stand the fluctuation of ERsystem cannot stand the fluctuation of ER

Extend the bandExtend the band

Ineffective for a small band and inviting Ineffective for a small band and inviting more speculation.more speculation.

A large band is equivalent to free floating.A large band is equivalent to free floating.


China: which choiceChina: which choice--- target a basket of currencies--- target a basket of currencies

Will float with dollar thus resulting a high Will float with dollar thus resulting a high transaction costtransaction cost

Difference between China and Singapore. Difference between China and Singapore. Large country with this system: the Large country with this system: the instabilities of other currencies.instabilities of other currencies.


Why still peg to dollar?Why still peg to dollar?

Optimal currency area theoryOptimal currency area theory

Transaction costs versus Transaction costs versus independent independent monetary policymonetary policy

The impossible trinity The impossible trinity

China can keep an independent monetary China can keep an independent monetary policy so long it restricts capital accountspolicy so long it restricts capital accounts


With adjustment optionsWith adjustment options

No permanent pegNo permanent peg

Adjustment may need for changes in Adjustment may need for changes in macroeconomic conditionsmacroeconomic conditions

Not dollarization .. Keep an independent Not dollarization .. Keep an independent monetary policy and seigniorage incomemonetary policy and seigniorage income


China: which choiceChina: which choice

No perfect policyNo perfect policy

The best choice is still a one-time The best choice is still a one-time adjustment, then pegging to dollar again.adjustment, then pegging to dollar again.

Least risk, least cost, and easiest to Least risk, least cost, and easiest to operate.operate.

Adjustment of 5-7%Adjustment of 5-7%

Unannounced in advanceUnannounced in advance


Internationalizing yuanInternationalizing yuan

Internationalization of yuan in the long runInternationalization of yuan in the long run

MeritsMerits

1. More flexibility for an independent monetary 1. More flexibility for an independent monetary policypolicy

2. Low transaction cost2. Low transaction cost

3. Seigniorage income3. Seigniorage income

ConditionsConditions

1. Good macro fundamentals1. Good macro fundamentals

2. Greater role in the global market2. Greater role in the global market


China: when to adjustChina: when to adjust

Exchange rate adjustment is a net Exchange rate adjustment is a net economic gain for Chinaeconomic gain for China

Exchange rate adjustment is also a Exchange rate adjustment is also a diplomatic gain for China in the worlddiplomatic gain for China in the world

Exchange rate adjustment is also a Exchange rate adjustment is also a political gain for China.political gain for China.


Conclusion: when to adjustConclusion: when to adjust

Resisting the market force is a sure failureResisting the market force is a sure failure

It is a choice on the ground of economic It is a choice on the ground of economic rational and gainrational and gain

It is not a choice on the ground of political It is not a choice on the ground of political or economic fight – a loss-loss outcomeor economic fight – a loss-loss outcome

Take an action, the sooner, the better.Take an action, the sooner, the better.

the controversy over the revaluation and exchange rate regime of the chinese currency...

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