Does China's Huge External Surplus Imply an Undervalued Renminbi?
Article first published online: 6 JUN 2007
China & World Economy
Volume 15, Issue 3, pages 89–102, May–June 2007
How to Cite
Makin, A. J. (2007), Does China's Huge External Surplus Imply an Undervalued Renminbi?. China & World Economy, 15: 89–102. doi: 10.1111/j.1749-124X.2007.00070.x
- Issue published online: 6 JUN 2007
- Article first published online: 6 JUN 2007
- economic growth;
- exchange rate;
- monetary policy;
- trade surplus
A pegged exchange rate regime has been pivotal to China's export-led development strategy. However, its huge trade surpluses and massive build up of international reserves have been matched by large deficits for major trading partners, creating acute policy concerns abroad, especially in the USA. This paper provides a straightforward conceptual framework for interpreting the effect of China's exchange rate policy on its own trade balance and that of trading partners in the context of discrepant economic growth rates. It shows how pegging the exchange rate when output is outstripping expenditure induces China's trade surpluses and counterpart deficits for its trading partners. An important corollary is that given its strictly regulated capital account, China's persistently large surpluses imply a significantly undervalued renminbi, which should gradually become more flexible.