How China’s Currency Regime Negatively Impacts the World and What Are the Solutions?

BY KEFEI WU

Many scholars around the world have been studying China’s currency regime and have labeled China as a currency manipulator. Tracing its history, the RMB “has seen many different policy regimes, has been pegged to the U.S. dollar, allowed to float, and intentionally devalued by the Chinese government1.” However, under the definition of “currency manipulator” by the U.S. Department of Treasury, the IMF Articles, and the WTO rules, China cannot be considered a currency manipulator due to insufficient evidence. Regardless of the label, it is undeniable that the Chinese government’s intervention on exchange rate already causes the effects of currency devaluation. Such action poses negative impacts on the U.S., other foreign countries, and even China.

The United States

Due to the devaluation of the RMB, many U.S. policymakers contend that China is making its exports less expensive and U.S. exports to China more expensive2. In fact, U.S. trade deficits with China grew from $84 billion in 2000 to $347 billion in 20163. Some argue that it was the Chinese government’s intervention on the exchange rate that contributed to the significant trade deficit. As a result, many have also charged China for the high unemployment rate in the U.S.4.

To cope with these problems, some legislative proposals seek to apply to U.S.’s anti-dumping and countervailing duty measures to address China’s undervalued currency5. Nevertheless, disputes over whether such action would comply with the WTO rules and would be challenged by China impede the implementation of such measures6. Others propose to enact bills that identify countries with currency manipulation without taking “intent” into consideration, and impose proper actions (including punitive actions) to induce China to appreciate its currency more rapidly7. However, opponents of this proposal suggest that the bills could antagonize China, stimulating China to slow the rate of RMB appreciation further, and even lead China to retaliate against U.S. exports to China and/or U.S. firms in China8.

Other Foreign Countries

Other foreign countries could also economically suffer from a devalued Chinese currency. For instance, in 2016, the exchange rate of U.S. dollars to RMB surged from 6.52 on January 5 to 6.59 on January 7, a 7% increase in two days9. The devaluation of the RMB worried many countries including South Korea, Japan, and Mexico. Because these countries were competing with China on exports and Chinese exports suddenly became cheaper, out of a fear of losing market, they also lowered the values of their currencies. The finance minister of Mexico warned that the Chinese currency actions could lead to a new round of competitive devaluations, while the Korean Won was down 5 percent10.

Scholars have suggested the IMF to take actions against China’s currency devaluation. However, the IMF lacks any enforcement mechanisms11, and China could easily argue against any complaint by stating that China’s goal is merely to foster domestic development through stabilizing the value of its currency12. Compensating the disadvantage of the IMF, policymakers also recommend the WTO to solve the problem because the WTO has a dispute resolution system and enforcement capabilities13. Nonetheless, Article XV(2) of the GATT explicitly indicates that currency manipulation issues belong to the IMF14. Thus, the WTO lacks jurisdiction even though it has enforcement power.

China

An undervalued RMB could also have negative impacts on Chinese economy and the standard of living of Chinese citizens. Since the RMB is relatively cheaper than projected market equilibrium, China is overly dependent on exports, which makes it more vulnerable if the global economy suffers from another slowdown15. Also, an undervalued currency conversely makes imports more expensive, forcing Chinese citizens and firms to pay more on imported products16. Facing these potentialities, China faces the option to rebalance its currency by gradually withdrawing government intervention on the exchange rate. The potential setback is that China would lose its economic advantage in exporting, and the U.S. debts would be worth less to China.

In conclusion, even without considering China as a currency manipulator, the devaluation of the RMB has a widespread impact on global economy and individual countries including China itself. However, current proposals are incompetent to solve the problem. From a future perspective, a change may require the IMF or the WTO to gradually gap ambiguities in their rules or China to reform its exchange regime further to allow a more liberal currency market.

Image source: cnn.com

About the Author 

Kefei Wu is an intern with the Eurasian Conflicts Studies Project (formerly Armed Conflicts Project) at the ERA Institute. 

DISCLAIMER: The views and opinions expressed in the article are solely those of the author(s) and do not necessarily reflect the official policy or position of the ERA Institute.