Monday, October 17, 2005

What's the Future of China's Flexible Currency?

The discussion in the United States on China's exchange rate policy has been controversial. Earlier in the spring of this year, some U.S. legislators have threatened to impose a 27.5% tariff on Chinese imports if China remains slow in changing its exchange rate policy.

China has finally unpegged its currency in September of this year. The current discussion between the United States and China is how much the trading band is allowed to float, and the timeline for a complete floating rate in the future.

In late July, the renmenbi (RMB) was revaluated by 2.1%, in a managed float, with an allowed fluctuation of 0.3% a day. Against the euro and the yen it is about 3%. A complete floating exchange rate is not expected to come anytime soon.

The international law and policy implication of this floating Chinese exchange rate is that, while exchange rate fluctuations will ease the current trade imbalance, they also provide daily indication on the strength of China's economy. One may stop and wonder about this scenario very far into the future--what if the RMB becomes so strong and widely traded that it can be used as an international currency to pay for oil?

Richard McGregor and Darryl Thomson, China Widens Trading Band of Renmenbi, Financial Times, Sept. 24, 2005, at

Edmund L. Andrews, Snow Shifts Its Demand on China, N.Y. Times, Oct. 18, 2005.

Foundation for the Economics of Sustainability.

No comments: