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China’s Response to U.S. Pressure to Revalue the RMB

Post Series: 2012: Volume 11, Number 1
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Introduction

China's Response to U.S. Pressure to Revalue the RMBAs the U.S. presidential election draws nearer and the People’s Republic of China also faces a year of leadership change, the issue of Chinese currency revaluation has garnered an increasing amount of attention in both countries. Already, American voters have seen Republican presidential candidate Mitt Romney assert that the U.S. must take a more aggressive stance in demanding that the renminbi (RMB) appreciate against the U.S. dollar. RMB appreciation would make Chinese goods more expensive for U.S consumers and U.S. goods less expensive for Chinese consumers, thus increasing U.S. exports and Chinese imports and improving the U.S. trade deficit with China. China, however, has refused to fully satisfy U.S. demands, despite Romney’s pledge to declare China a currency manipulator on day one of his presidency should he be elected.1 Thus, the relevance of the currency revaluation issue cannot be underestimated.

Since Secretary of the Treasury John Snow’s visit to China in 2003, the U.S. has persistently pressed Beijing to allow the RMB to appreciate, and China has, in fact, responded positively, allowing the RMB to appreciate by 40 percent over 7 years, from the time China adopted a floating exchange rate in July 2005 to February 2012.2 At the same time, using the People’s Bank of China (PBC) and the official Xinhua news agency, Beijing has advanced a set of arguments against rapid RMB appreciation. Beijing apparently hopes that principled refutation of U.S. demands coupled with slow, incremental compliance will placate the U.S. Congress and Treasury Department and foster stable relations between the two countries. This two-pronged response arises from China’s important yet conflicting policy objectives. On the one hand, the People’s Bank of China, the country’s central bank, has affirmed that a policy of incremental appreciation is needed to maintain the country’s economic stability and encourage economic growth. On the other hand, China argues that appreciating the RMB against the U.S. dollar too quickly will disrupt the developing country’s export-led economy, potentially resulting in instability in the form of unemployment, mass migration and labor strikes. The combination of incremental RMB appreciation with arguments against U.S. pressure can be explained partly by a rational government strategy for maintaining stability and partly by a perceived need to project an image of an independent China that does not capitulate to foreign demands. Ultimately, however, both U.S. pressure and China’s own goals to rebalance its export-dependent economy call for further currency appreciation, and therefore it is likely that China will continue to appreciate the RMB.

Factors Pushing China toward RMB Appreciation

The main factor pushing China toward RMB appreciation is U.S. pressure, considering that China does not wish to jeopardize the stability resulting from lucrative trade with the U.S. This point is demonstrated by the fact that China has appreciated the RMB only when the U.S. has threatened punitive measures otherwise. For instance, on July 21, 2005, the People’s Bank of China implemented a managed floating exchange rate regime, which resulted in a 2.1% appreciation of the RMB.3 In February of that year, Senators Charles Schumer and Lindsey Graham introduced a bill demanding China “make a good faith effort to revalue its currency upward placing it at or near its fair market value” within 180 days or risk a 27.5% tariff on any article it exported to the U.S.4 The second time China appreciated the RMB was on May 21, 2007, when the People’s Bank widened the trading band in which the RMB could float against the U.S. dollar from 0.3% to 0.5% in daily movement.5 This followed renewed threats of a vote on the 27.5% tariff bill. Sen. Schumer ominously stated, “We are not satisfied with simply a 2% revaluation,” and under this persistent threat of U.S. tariffs, China again responded by allowing the RMB to appreciate. 6 By July 2008, the RMB had appreciated 21% against the dollar.7

There is evidence that China might not have appreciated the RMB of its own accord. From mid-July 2008 to mid-June 2010, the RMB exchange rate began to plateau at around 6.83 yuan to the dollar.8 With the onset of the global financial crisis in 2008, China started to experience an economic slump caused by decreased demand for Chinese goods. It appears that the Chinese government did not want to aggravate the ailing condition of the export industry by continuing to allow the yuan to appreciate. Schumer, however, and 13 other senators introduced a bill in March 2010 requiring the U.S. Secretary of the Treasury to provide Congress with biannual reports identifying any country found to have a “fundamentally misaligned currency” and requiring the Commerce Department to impose tariffs on specified goods from those countries.9 China was a primary target, but Treasury Secretary Timothy Geithner chose to delay the report in April 2010, leaving an enduring threat of potential tariffs against China. As a result, on June 19, 2010, the People’s Bank announced it had “decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.”10 The Chinese currency appreciated by roughly another 3% against the U.S. dollar from June 19 to October 15, when the U.S. Treasury Department announced that it would again delay the publication of the report on international exchange rate policies, citing China’s progress.11 Slight appreciation would not satisfy the U.S. for long, however, and finally, in October 2011, the Senate passed the Currency Exchange Rate Oversight Reform Act by a vote of 63-35. While it remains uncertain how the bill might fare in the House of Representatives, passage in the Senate is the closest the U.S. government has come to retaliating against China’s currency undervaluation, and it has led the Chinese government to lobby Congress against further action. As of April 16, 2012, China also has allowed as much as 1% in daily fluctuation of RMB value, up from the 0.5% limit set in May 2007.12 Clearly, China has not ignored pressure from the U.S. Congress and Treasury Department, but instead enacted policy changes in July 2005, May 2007, June 2010 and April 2012 in response.

China’s National Strategy to Gain Time

Naturally, Chinese officials have asserted that policies appreciating the RMB were introduced because they were in China’s national interest. The People’s Bank of China has stated that its purpose was to “safeguard the overall stability of China’s foreign economic and trade environment … as well as the sustained, coordinated and healthy growth of the Chinese economy.”13 Appreciation of the RMB could contribute to future economic growth by making imported products cheaper for Chinese buyers, thereby stimulating domestic demand. However, as China’s economy stands today, growth is largely export-led, benefitting from an undervalued currency that makes its exports relatively cheap. The face of the Chinese economy must change before benefiting from RMB appreciation in this way, and for this reason, Chinese officials have listed “the rise in domestic consumption” as a key target of economic restructuring in their 12th Five-Year Plan.14

It follows that Chinese policymakers would want to gain time for structural change before enacting exchange rate policy changes. A wider RMB trading band allows the currency to fluctuate nearer fair market value but does not address the U.S. demand that China quickly revalue the currency upward.15 In fact, the PBC has said that hastening RMB appreciation before enacting reforms in state-owned commercial banks and liberalizing service trades could jeopardize the country’s domestic economic stability.16 Essentially, China claims while exchange rate reform is one element of the overall restructuring effort, it need not be the first.

Another argument intended to buy time for Chinese policymakers suggests that the exchange rate plays an important role in stability during times of crisis — such as the current economic downturn. Keeping the RMB undervalued was helpful in the 1990s, facilitating the accumulation of large foreign reserves that acted as insurance and allowed China to avoid seeking IMF assistance during the Asian Financial Crisis.17 More recently, Xinhua assured its readers that China is “sticking to its appreciation policy amid the unfolding global crisis … ensuring the continued growth and stability within its own economy.”18 The U.S., meanwhile, argues that stockpiling foreign reserves aggravates the trade imbalance between the two countries.

China vocally denies that its decisions have been in response to U.S. complaints. Chinese Central Bank Governor Zhou Xiaochuan maintained that in setting exchange rate policy, the PBC would mainly take into consideration the “domestic economic situation and balance of payments rather than the bilateral trade deficits or surpluses with some individual countries.”19 If there were any doubt this statement was directed at the U.S., Zhou also asserted that “the U.S. trade deficit may be attributable to structural imbalances and fiscal deficits in the United States rather than the RMB exchange rate.”20 He went on: China would “push ahead with the reform of the RMB exchange rate regime on a well-planned and step-by-step basis. Relevant policy measures will only be taken at the proper time.”21 Given China’s history of exploitation by Western powers over the past 200 years, insisting it will not yield to foreign dictates on RMB appreciation may be a means of saving face. Interestingly, however, “the proper time” has always been directly after the application of U.S. pressure.

Factors Pushing China against RMB Appreciation

A more valuable RMB means China’s manufactured goods will be more expensive and thus less competitive in America, its top export destination. The importance of exports to China’s economic stability cannot be underestimated. The IMF reports that “fixed investment related to tradable goods plus net exports together accounted for over 60% of China’s GDP growth from 2001 to 2008 (up from 40% from 1990 to 2000), which was significantly higher than in the G-7 countries (16%), the euro area (30%) and the rest of Asia (35%).”22 For a developing country reliant on manufactured exports, RMB appreciation could be detrimental to the stability and growth of China’s economy overall.

Disruption of the Chinese economy also affects social stability, which has been shaken by export-related job issues, including numerous strikes. Chinese officials fear two probable reactions of export producers to appreciation of the RMB: shutting down factories when they can no longer compete, or holding down wages to remain competitive. Either way, unrest can result from loss of jobs as manufacturers are forced out of business, or from worker demonstrations as wages suffer.

Chinese agricultural products also would be less competitive globally with a higher valuation of the RMB. A stronger yuan would facilitate cheaper agricultural imports and cut into profits from agricultural exports. This could result in job and income losses for China’s large rural populations, where many are employed in labor-intensive farm jobs. Cities would then feel a further strain as even more people in agricultural areas migrate in search of comparatively fewer jobs in less-labor-intensive sectors. Again, Chinese policymakers opt not to appreciate the RMB quickly in hopes of maintaining economic growth while avoiding unrest.

China’s Media and Soft Power

Projecting independence when it comes to exchange rate policy has been a theme in the state-controlled Chinese media. The Xinhua news agency has highlighted the claim that “the yuan exchange rate did not cause the trade imbalance between China and the United States,” and that targeting the yuan is no antidote to global economic problems.23 Saving face also is an obvious goal, as seen in Xinhua’s declarations that “the yuan’s appreciation will not compromise to foreign pressure, and China will write its own ticket on the pace of its currency’s appreciation.”24 Some argue that Xinhua is a way for the Chinese government to exercise soft power by “countering the dominance of Western news outlets and conveying a Chinese perspective on events” within the country and increasingly abroad, through outlets such as CNC World, its global English-language TV channel.25

China also has exercised soft power by launching an unprecedented lobbying effort through a Congressional liaison team in the Chinese embassy in Washington. This team reportedly has arranged meetings with key lawmakers’ aides and made phone calls to congressional offices in an attempt to kill the Currency Exchange Rate Oversight Reform Act. Through the Foreign Agents Registration Act, it’s also known that the Embassy is drawing on the lobbying expertise of Patton Boggs, a Washington law firm, at an estimated cost of $35,000 a month.26

Though the cost to China could potentially be far higher should the Currency Exchange Rate Oversight Reform Act pass the House of Representatives, Speaker John Boehner has hinted that the chances it will ever be voted on are slim, saying that he considered it “dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency.”27 Nevertheless, the bill’s introduction serves as a tangible demonstration of American discontent with Chinese policy. China’s response to that discontent likely depends in great part on the Chinese perception of America’s motives. Chinese Vice Premier Wu Yi appears to think that the push for “considerable revaluation cannot help at all and could probably injure the interests of the two countries and the public.”28 Why, then, does the Chinese government believe that the U.S. wants it so badly? China may conclude that the real objective is not to bolster the U.S. economy but to repress the Chinese economy. In an exclusive interview with Xinhua, Premier Wen Jiabao said flatly, “the purpose is to hold back China’s development.”29 Xinhua added, “China would not yield to foreign pressure for the appreciation of its currency, or renminbi, in any form.”30 Almost two years later, The People’s Bank of China announced that the bill passed by the U.S. Senate would not solve its problems, but “might seriously affect the progress of China’s reform of the exchange rate regime and might also result in a trade war.”31 Thus, future Sino-U.S. relations are likely to be significantly affected by the Chinese perception of Congressional pressure to appreciate the RMB. If pressure is perceived as an injurious attempt to hold China back, it could be grounds for China to instigate a trade war. Similarly, U.S. election rhetoric also has the potential to influence how China perceives and responds to U.S. pressure in the future. Accordingly, Mitt Romney’s threats to declare China a currency manipulator may, in China’s view, foreshadow a future trade war, prompting China to pursue a soft power strategy aimed at allowing the Chinese to appreciate the RMB at their own pace without facing punitive action from the U.S.

  1. John Harwood, “The Electoral Math of Romney’s Stance on Trade with China,” 22 March 2012, The New York Times website. http://www.nytimes.com/2012/03/23/us/politics/mitt-romneys-stance-on-china-trade.html?pagewanted=all
  2. David Leonhardt, “As China’s Currency Rises, U.S. Keeps Up Its Pressure,” 15 February 2012, The New York Times website. http://www.nytimes.com/2012/02/16/business/global/appreciation-in-chinas-currency-goes-largely-unnoted.html
  3. David Barboza, “Revaluation’s Effect on China Travel,” 7 August 2005, The New York Times website. http://www.nytimes.com/2005/08/07/travel/07advyuan.html
  4. 109th Congress Bill Text S.295.IS, 3 Feb. 2005, Senate and House of Representatives of the United States of America, Library of Congress website. http://thomas.loc.gov/cgi-bin/query/z?c109:S.295:
  5. Zhu Qiwen and Xin Zhiming, “Exchange Rate Could Float in Wider Band,” 26 May 2007, China Daily website. http://www.chinadaily.com.cn/china/2007-05/26/content_880766.htm
  6. Anjali Athavaley, “Schumer and Graham May Press for China Tariffs,” 29 July 2005, Washington Post website http://www.washingtonpost.com/wp-dyn/content/article/2005/07/28/AR2005072802040.html
  7. Daniel Ikenson, “Chinese Currency Rise Will Have a Negligible Effect on the Trade Deficit,” 24 March 2010, Cato Institute website. http://www.cato.org/pubs/ftb/FTB-041.pdf
  8. Wayne M. Morrison and Marc Labonte, “China’s Currency: An Analysis of the Economic Issues,” 3 August 2011, Congressional Research Service, Federation of American Scientists website. http://www.fas.org/sgp/crs/row/RS21625.pdf
  9. “As Trade Deals Head towards Approval, Backlash Grows against China,” 8 October 2011, The Economist website. http://www.economist.com/node/21531486
  10. People’s Bank of China Statement, “Further Reform the RMB Exchange Rate Regime,” 19 June 2010, People’s Bank of China website. http://www.pbc.gov.cn/publish/english/955/2010/20100622144059351137121/20100622144059351137121_.html
  11. Treasury Department Statement Regarding Decision to Delay the International Economic and Exchange Rate Policies Report to Congress, 15 October 2010, U.S. Department of the Treasury website. http://www.treasury.gov/press-center/press-releases/Pages/tg910.aspx
  12. Keith Bradsher, “China Adjusts Currency Trading Rules,” 14 April 2012, The New York Times website, http://www.nytimes.com/2012/04/15/business/global/china-adjusts-currency-trading-rules.html?_r=3&scp=1&sq=China%20curency%20trading%20rules&st=cse
  13. Speech by Zhou Xiaochuan before Inauguration Ceremony of The People’s Bank of China Shanghai Head Office, 10 August 2005, The People’s Bank of China website. http://www.pbc.gov.cn/publish/english/956/1943/19432/19432_.html
  14. Deng Shasha, “Key Targets of China’s 12th Five-Year Plan,” 5 March 2011, Xinhua English News website. http://news.xinhuanet.com/english2010/china/2011-03/05/c_13762230.htm
  15. Paul R. La Monica, “China and the U.S.: It’s Complicated,” 16 April 2012, CNN Money website, http://money.cnn.com/2012/04/16/markets/thebuzz/index.htm
  16. Zhou Xiaochuan, Interview with Xinhua News Agency, “Questions on RMB Exchange Rate,” 3 September 2003, The People’s Bank of China website. http://www.pbc.gov.cn/publish/english/955/1983/19839/19839_.html
  17. Aditya Bindal, “Strategic Implications of China’s Foreign Exchange Reserves,” April 2010, Keck Center for International and Strategic Studies website. http://www.claremontmckenna.edu/keck/student/BindalAFellowshippaper050310.pdf
  18. Mo Honge, “Forcing Yuan Appreciation Benefits Nobody,” 10 October 2011, Xinhua English News website. http://news.xinhuanet.com/english2010/indepth/2011-10/10/c_131182105.htm
  19. Zhou Xiaochuan, Interview with People’s Daily, “Exclusive Interview with People’s Daily,” 8 May 2005, The People’s Bank of China website. http://www.pbc.gov.cn/publish/english/956/1942/19425/19425_.html
  20. Zhou Xiaochuan, Interview with Xinhua News Agency, “Questions on RMB Exchange Rate,” 3 September 2003, The People’s Bank of China website. http://www.pbc.gov.cn/publish/english/955/1983/19839/19839_.html
  21. Zhou, Interview with People’s Daily
  22. Morrison and Labonte, “China’s Currency: An Analysis of the Economic Issues”
  23. Liu Xiao, “Chinese Ambassador Says Stronger Yuan Alone Won’t End U.S. Job Woes,” 19 November 2011, Xinhua English News website. http://news.xinhuanet.com/english2010/china/2011-11/19/c_131257545.htm
  24. Liang Jun, “RMB’s Appreciation to Remain Gradual,” 13 September 2011, China News website. http://www.china.org.cn/business/2011-09/13/content_23400908.htm
  25. Anton Troianovski, “China Agency Nears Times Square,” 30 June 2010, The Wall Street Journal Online. online.wsj.com/article/SB10001424052748704334604575339281420753918.html
  26. Tim Reid and Susan Cornwell, “China Launches Lobbying Push on Currency Bill,” 11, Oct. 2011, Reuters website. http://www.reuters.com/article/2011/10/11/us-usa-china-lobbying-idUSTRE79A76S20111011
  27. Zhang Jun, “Obama Says Currency Bill on China Could Fall Foul of WTO Rules,” 7 October 2011, http://news.xinhuanet.com/english2010/world/2011-10/07/c_131177102.htm
  28. Zhu Qiwen and Xin Zhiming, “Exchange Rate Could Float in Wider Band,” 26 May 2007, China Daily website. http://www.chinadaily.com.cn/china/2007-05/26/content_880766.htm
  29. Geoff Dyer, “Wen Dismisses Currency Pressure,” 27 December 2009, Financial Times website. http://www.ft.com/intl/cms/s/0/3069c326-f2e5-11de-a888-00144feab49a.html#axzz1dcUNN1YX
  30. Jiang Xufeng, “China Won’t Yield to Yuan Appreciation Pressure,” 27 December 2009, Xinhua English News website. http://news.xinhuanet.com/english/2009-12/27/content_12711333.htm
  31. People’s Bank of China Statement, “U.S. Senate’s Voting to Consider Currency Exchange Rate Oversight Reform Act of 2011 on October 3,” 4 October 2011, People’s Bank of China website. http://www.pbc.gov.cn/publish/english/955/2011/20111004174509537934640/20111004174509537934640_.html
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