Wednesday, April 10, 2013

Evaluating the valuation of the Chinese renminbi

One of the hot topics in the 2012 presidential election was the valuation of the Chinese renminbi. Both candidates argued that they would pressure China to allow its currency to appreciate since they considered it to be under-valued. This presumably allowed China to expand its exports since its goods were priced artificially low. Romney went as far as saying that he would label China as a currency manipulator, a designation that would legalize the implementation of retaliatory tariffs. However, the data show that the Chinese currency has actually been appreciating over the course of the Obama administration, having risen 11 percent since January 2009 according to the NY Times (the downward shift in the graph below reflects this appreciation).

Another way of looking at this is via The Economist's Big Mac Index. According to that measure, the renminbi has appreciated 40.44% against the dollar. That is, a consumer buying a Big Mac in China had to pay $1.83 as of July 2008, but $2.57 as of January of this year (see below). Of course, Big Macs in the US still costs far more than that, averaging to $. Thus, the Big Mac Index indicates that the renminbi is still under-valued by 41.1%. In other words, while China's currency has appreciated in a material way since the start of the Obama Administration, it still has a ways to go for the law of one price to finally be achieved.

Still, this non-trivial rise begs the question of why has the currency appreciated as much as it has? Specifically, did political pressure from the US have an impact? Both the House (2010) and the Senate (2011) passed bills calling for administration action in response to the renminbi's low value. The Senate's recent bill required the administration to impose retaliatory tariffs on China, though the Republican-led House and the Obama White House were reluctant to adopt this hard-line approach for fear of provoking a trade war. Nevertheless, the Obama administration has continued to seek reform and it seems hard to say that these efforts are unrelated to the changes in the currency's value.  Ultimately, determining the precise role of American domestic politics in this rise presents a complicated question, though one deserving of more social scientific attention. As of now, no such work has attempted to do so, though others have been explored this broader topic.

What do you think?


  1. I think American domestic politics can and does influence actions by foreign countries, like China. While it is commonly agreed upon that the US is declining in its economic stance in the world, the US is still, as of right now, exercising hegemonic power in international economics. China is wary of import barriers against them from the US and other countries, because a loss of their export industry would severely hurt the Chinese economy.
    Speaking of hegemonic power, its interesting that the US takes upon itself to influence China's policies on exchange rate, intellectual property, barriers to entry, etc. It doesn't seem to me that China is overtaking the US in hegemonic power quite yet...

  2. What is often not mentioned in the same breath as China's supposed currency manipulation is the fact that the US has also artificially depreciated its currency the US Dollar through various methods, often under the guise of "quantitative easing" so as to address the weak economy. The last few years the US Dollar has been lower than ever, and the EU, China have not come out to condemn the US for using depreciatory monetary policy to address an economy crisis its own (the US') monetary policy might had e caused (keeping interest rates too loose too long) in the first place.

    Regarding the reasons for RMB appreciation, some commentators (such as Newsweek's Bruce Einhorn) would point to domestic Chinese politics and not US pressure as the main factor.

    Moreover, US. importers of Chinese goods would lose from Yuan appreciation. together with the fact that domestic Chinese production costs are increasing rapidly as well, this would be doubly costly, as Chinese commentators are quick to point out.

    1. BTW this is William Wicki, for some reason it does not display my name...