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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
©
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.
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 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
Gene Chang, June 2005Gene Chang, June 2005
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$)Trade deficit with China (million$)
Gene Chang, June 2005Gene Chang, June 2005
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”.
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
Estimation of Equilibrium Value Estimation of Equilibrium Value of Yuanof 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
Gene Chang, June 2005Gene Chang, June 2005
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)
Gene Chang, June 2005Gene Chang, June 2005
Estimation of Equilibrium Value Estimation of Equilibrium Value of Yuanof Yuan
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
Gene Chang, June 2005Gene Chang, June 2005
Estimation of Equilibrium Value Estimation of Equilibrium Value of Yuanof Yuan
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
Gene Chang, June 2005Gene Chang, June 2005
Estimation of Equilibrium Value Estimation of Equilibrium Value of Yuanof Yuan
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
Gene Chang, June 2005Gene Chang, June 2005
RMB exchange rateRMB exchange rate
0123456789
10
RER actual
Exchange rate (yuan per $)
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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.
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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.
Gene Chang, June 2005Gene Chang, June 2005
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.
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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
Gene Chang, June 2005Gene Chang, June 2005
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.
Gene Chang, June 2005Gene Chang, June 2005
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.