Sunday, January 25, 2009

China's currency "fundamentally misaligned"?

Sources: China hits back over renminbi comments, Financial Times; IMF in discord over renminbi, Financial Times; Obama Skeptical of Chinese Currency Value, Center for International Finance and Development

 The International Monetary Fund (IMF) is debating whether it should declare the renminbi, China’s currency, to be “fundamentally misaligned” after Barack Obama’s designated Treasury Secretary Tim Geithner accused China of “manipulating” the currency’s value (for more about Geithner’s statement, go here). Some IMF economists have concluded that China’s exchange rate created “a risk of disruptive adjustment,” but were not willing to say that China was purposely causing the problem. The value of China’s currency has been cause of international tension for several years now, so much so that the IMF’s executive board has refused to discuss the Chinese economy since 2006. Refusing to discuss the issue highlights the politically controversial nature of the problem among its member countries, especially in light an IMF resolution in 2007 to increase its oversight of the member countries’ exchange rates.

 Because China does not borrow from the IMF, the international financial organization lacks the power to force China to change its exchange rate policies. However, an IMF declaration that China’s currency is “fundamentally misaligned” would be another tool the U.S. and other member countries could use to put pressure on China to let its currency rise in value in the international markets. The United States wants this to happen because a country with under-valued currency has a competitive edge in international markets. The country is able to undercut the prices of other countries exports, offering its own goods at cheaper rates.

Record trade surpluses over the last three months, in spite of the global financial crisis, provide fuel to the United States’ claims and indicate that the renminbi is still undervalued. China has denied Geithner’s manipulation claims and accused the United States of merely exploiting the issue to implement stronger protectionist policies in its international trading.


(1) Do you think China is actually manipulating the value of its currency to gain an advantage in its international trading?

(2) If China is manipulating the renminbi, what should the United States and the rest of the world do about it?

(3) Why is the IMF hesitant to discuss the Chinese currency issue and what would happen if it did?

No comments: