The currency dispute of the U.S. with China can be dated back to 1994 when, for the first, and also the last, time the U.S. Treasury faulted the Chinese authorities for manipulating the RMB rate. Since then, no currency report of the U.S. Treasury has ever accused China of manipulating its currency. The currency reports had to conform to a half year periodicity as required under U.S. law. However, these reports were often delayed from time to time and were used as a diplomatic ploy to put pressure on China, especially its central bank, the People’s Bank of China (PBoC). China was unyielding to external pressures and stood firm like a rock. It made it explicit that it would not yield to external pressures. It also clarified that in determining the exchange rate for the RMB, it was solely guided by its concern for economic growth and stability. As the debates went on, it also explained that over the years the RMB had become a currency which promoted inter-Asia trade flows and a stable rate for the RMB was necessary to maintain stability in the Asian region. Even as China’s manufacturing capacity increased, it led to a situation where components and intermediates were sourced from Asian neighbors and the final processing (value addition) was done in China. That is to ay China had become the manufacturing hub of a larger part of Asia. China also drew attention to the responsibility it owed to the Asian neighbors in maintaining the stability of the RMB rate in the Asian crisis years (1997-98) when many currencies were depreciated and the fear was that if China devalued, the Asian crisis would deepen further.
China’s currency policy and its battles with the U.S. and also some other countries has had several twists and turns. China began to peg the RMB to the dollar at about 8.28 Yuan per dollar and kept the rate constant through July 2005. In 2005 it moved to a managed peg and began to allow the RMB to gradually appreciate over the next three years. This change in policy as attributed to diplomatic pressure from the U.S. This can be disputed. It was indeed due to the changed role of China in the global trade. In 2008 it halted the currency appreciation in the wake of the global economic crisis (or the Great Recession) and its impact on China’s exports, etc. Around this time the diplomatic exchanges were furious and the U.S. tried to involve the IMF in the initial stages and keep pressure on China through its so-called powers to engage in surveillance. Arguments like global imbalance were also invoked. These proved to be in vain. IMF had to admit that it was not appropriate to sit in judgments over the value of currencies. Attempts were also made to involve the G-20 in the controversy and these did not bring about any success except for the inclusion of a harmless sentence in the G-20 communiques that members should maintain a responsible policy in regard to their exchange rates and not adversely affect the exports of other members.
From June .2010 China began to resume appreciation of the RMB. It was observed that from July 2005 through June 2013 the RMB appreciated by 34% on a nominal basis against the dollar and by 42% on a real (inflation adjusted) basis. In recent years China’s exports have declined and its reserve accretion has slowed down. Despite these trends, there are critics who continue to maintain that the RMB is undervalued. It is noteworthy the currency debate is not as acrimonious during recent months. In great part this is due to the adoption of Quantitative Expansion (QE) policies adopted by the US Fed.
China was in the forefront in attacking Fed’s QE policies. Basically it devalues the dollar and puts all other currencies at a disadvantage. This flows from the fact that the US dollar is the only reserve currency and it gives undue advantage to the US. Dr. Zhou Xiachuan of the PBoC has carried on the attacks on the U.S. dollar as a reserve currency ad the adverse (r the disadvantage) situation it creates for other countries, especially the developing economies. He has putforwar several suggestions to replace the Dollar such as expansion of SDR, inclusion of the RMB in the SDR basket, etc. Another front China has opened is to widen the use of RMB in international transactions. It has entered into swap arrangements with many countries. It allows offshore use of RMB for financing. Countries like Australia, the U.K. and France have signed agreements. London is keen to play a role in offshore RMB balances. It has substantially increased the role of Dim Sum bonds. The endeavor is to create conditions over the years to internationalize the RMB. There are interesting debates on this issue both with China and in the western press and academia. Many take the view that unless the RMB becomes convertible, it may not fill the bill as an international currency. However, China is not in a hurry and has a vision for the coming decade or so. Inded this is very rich and deep and our paper will elaborate the underlying themes and conflicts.
(The writer, Mr K.Subramanian is an Associate of the Chennai Centre for China Studies (C3S). This formed abstract of his paper on the subject prepared for presentation at the Third Annual Conference on “Inside China 2013: New Leadership, Social Changes and Economic Challenges”, jointly organised at New Delhi on 6 September 2013 by the C3S, India International Centre, New Delhi,Institute of Policy and Conflict Studies, IPCS, New Delhi, Department of East Asia Studies, Delhi University and Centre for East Asia Studies, Jawaharlal Nehru University, New Delhi Email: firstname.lastname@example.org).