Renminbi Case

662, Case 3 1. Do you think the Renminbi is overvalued against the US Dollar? 2. Why does the Chinese government want to hold the line its currency at an artificially low level against the US Dollar? What is the risk for china? For the US? 3. What would be the consequences of a 20% revaluation (increase in the value of the Renminbi) for China, western countries, Japan, and developing countries? How would it impact workers, exporters, and importers in China? Various studies aim suggested that the RMB is undervalued, with recent estimates ranging from 15-50 percent.The greatest beneficiary from a gradual RMB revaluation, accompanied by measures to stimulate demand, will be China itself. Its gain is likely to be more balanced and resilient, and that will have a positive spillover on the watch of the world, including by reducing currency and trade tensions. RMB revaluation causes a loss to consumers outside China since they will confront higher prices of goods imported from China. T hese losses have to be offset against those of producers who will gain agonisticalness.Moreover, Chinas trading partners are more likely to gain from RMB revaluation if it comes with measures that accelerate Chinas domestic demand relative to its GDP. Indeed, without those measures, the effect of RMB revaluation on Chinas current account surplus is likely to be marginal or even to widen it. In the very long run, a revaluation of the RMB could help commodity-exporters to diversify into basic manufacturers. However, over the next few years, RMB revaluation is tall(a) to affect these countries exports significantly because the prices of their commodity exports are determined in global markets (and denominated in dollars).However, the dollar prices of Chinas exports to those countries are likely to rise, reflecting small mesh margins in those sectors and the fact that China, as the biggest exporter of those goods, is the price-setter. Some middle-income manufacturing exporters runnin g a trade surplus with China will benefit, too. Other middle-income exporters that import a lot from China could be net losers from the hike in Chinas export prices in the short term, but gain as their export volumes expand at Chinas expense.Low-income commodity exporters will generally be net losers from RMB revaluation alone and will only benefit if Chinas growth accelerates because of accompanying measures taken by the Chinese authorities. Some high-income countries, such as Germany and Japan, which have an initial small trade deficit with China, may lose or gain a little from RMB revaluation alone. However, countries such as Italy and the United Stateswhose initial trade deficits with China are large and whose exports are not competitive with Chinaswill very likely lose, and their lower-income consumers will suffer most as the price of Chinese goods rises.This conclusion does not imply a judgment that a large bilateral trade deficit in Italy and the United States with China is g ood or bad. It only implies that RMB revaluation is not the representation to fix the deficit problem. Instead, increasing national savings rates in Italy and the United States, and increasing consumption in China would be more effective. addicted Chinas high dependence on price-sensitive exports, a large one-time RMB revaluation may carry unacceptable risks to its growth and stability. In the event of a sharp slowdown in China, those countries that are likely to lose from RMB revaluation anyway, starting with the United States.