effect of depegging rmb

pegging was seen to contributing to ‘internal and external stability’

• under peg, experienced growth of ~9% per annum (compared to 3.3% in u.s., 2.2% in eu)
• annual exports increased from $121billionin1994to$762 billion in 2005, and to $1.43 trillion in 2008
  • increase in exports was attributed to pegged regime during the time
  • however, still continuous increase in exports even after de-pegging in 2005

widening trade imbalance between u.s. and china led to disputes over pegging

• came from both foreign countries which felt that china had unfair international trade competitiveness, along with local export businessmen who felt their exports were undervalued in terms of foreign currency
  • widespread view that rmb was undervalued in real terms against usd before july 2005
  • studies concluded that rmb was significantly undervalued by around 15%-30% compared to USD before depegging
• chinese pegged exchange rate regime was held responsible for deindustrialization of u.s. economy
  • continued rise in u.s.-china trade imbalance etc caused congress members to call on bush administration to take more aggressive stance against certain chinese trade policies
    • some congress members argued that china manipulates currency to make exports cheaper and imports more expensive than they would be under a floating exchange rate system
    • u.s. demanded a significant appreciation of around 20% of the rmb, threatened china with ‘protectionist’ measures before depegging

since depegging, rmb could appreciate slowly against the usd nominally

• appreciated by 5% in nov 2006, 10% in oct 2007, to u.s. desired level of 20% in june 2008
• for over a year since exchange rate hit u.s. desired 20% appreciation, rmb hovered around that exchange rate level like a pegged regime
  • indicates that managed float exchange rate arrangement has not gone far in causing adverse effects

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