Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174845
Authors: 
Plasschaert, Sylvain
Year of Publication: 
2011
Series/Report no.: 
ECIPE Working Paper 02/2011
Abstract: 
Alarmed by the persistent and large US trade deficit vis-à-vis China and the rapidly swelling Chinese foreign exchange reserves, influential US policymakers are urging the Chinese authorities to allow a substantial appreciation of the Renminbi (RMB). This paper establishes that the arguments advanced to this effect are quite weak, as they overlook salient features of the present international economy and of China's financial system. Indeed, the record growth of China's exports to the US stems largely from joint ventures and affiliates of multinational enterprises; exports attributed to China usually contain a large percentage of imported components with modest value-added attributed to China itself and - indeed, the Chinese export portfolio is in the process of being significantly upgraded. Neither are the gigantic foreign exchange reserves primarily linked to the modest surpluses of exports over imports of China, but they are fed by these large net inward direct investments; and, in recent years, by "hot money" which sneaks into China, notwithstanding the non-convertibility of capital flows. Thus, a moderate appreciation of the RMB would not equilibrate the bilateral trade flows or remedy current account imbalances. On the other hand, the shift in China's growth strategy - away from export maximisation towards strengthening consumption in the vast interior - is likely to gradually bring about more balance, while appreciating the RMB in the process. There are also recent signs of easing of Chinese restrictions on international financial transactions.
Subjects: 
trade balance
trade
foreign exchange
China
current account
monetary policy
international economic order
currency reserves
multinational enterprises
JEL: 
E22
E52
E58
F14
F23
F31
F32
F42
Document Type: 
Working Paper
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