Article first published as Implications of China Monetary Policy on Global Imbalances on Blogcritics.
China’s exchange rate policy has been a contentious issue in the global economy particularly between the China and the West. The West has long been criticizing China for keeping Yuan at an exceptionally lower value. They claim China is in an advantage position due its manipulated lower Yuan value, as it makes China exports cheaper. The US President Mr. Obama accused China as currency manipulator in his earlier days of coming to power.
West’s Concerns
The West says China had pegged Yuan value to the dollar. Yuan value did not change from its value of ¥6.83 a dollar since July 2008. However, China denied the claim on equal tone and resisted pressure from Obama to raise 
Many Economists and analysts suggested to China, it would be fair to share the growth of the economy by appreciating the Yuan value, when China recorded 11.9 percent of growth rate in the first quarter. Nevertheless, China did not find any pressing reasons for immediate appreciation of the Yuan value then.
The US Retaliation
The US Treasury Secretary Tim Geithner postponed submitting his report on whether the China was manipulating its currency value or not, to the Congress in April. It was rather a soft approach by the US, hoping China would reciprocate positively by tightening its monetary policy. It was also a revelation that the US was wary of trade war against China. China invested nearly 70% of its vast foreign reserves in the US Treasury bonds.
Instead of opting for trade war, the US resorted to several political actions against China with a touch of some economic flavor. It approved $6.4 billion valued arms sales to Taiwan amid accusations of arrogance and cold-war mentality from China. The package included 114 Patriot missiles, 60 Black Hawk helicopters and communications equipment for Taiwan’s military use. Some rumors were out from Chinese side that the Chinese PLA suggested the China should sell the US bonds in retaliation for selling arms to Taiwan.
The US President Obama met Tibetans’ spiritual leader Dalai Lama despite warnings from China. The US imposed anti-dumping duties on tyres and Iron imports from China. Cyber-attack allegations and condemnations exchanged between the two countries for several months last year.
The US also conducted joint military exercises with South Korea in South China Sea, in the name of countering threats from North Korea. North Korea was alleged sinking South Korean submarine with a torpedo. China warned the US seriously on the exercises of serious consequences and conducted its own exercises separately in South China Sea.
Chinese Response
China finally responded in May regarding the exchange rate of Renminbi, another name for Yuan. It said in May last week this year that it was committed to the reforming of exchange rate regime, but stressed the reform would only be based on the needs of China’s own economic development and it would not succumb to external pressures. From then on the West waited eagerly for Yuan’s appreciation.
Although, the G-20 ministerial conference spared Chinese currency policy from a specific mention in its communique in June 1 weak, the IMF and the US issued separate letters to the G-20 participants pointing out the need for Yuan’s appreciation. Both the US and the IMF stressed the Yuan appreciation as the key for global rebalancing of economies. G-20 summit at Toronto in last week of June also did not make any explicit mention of Yuan value, as China warned before the summit that its monetary policy issues could not be mentioned on international forums.
Depegging
China announced on June 19 that it was leaving a part of the Yuan value to market influence. It meant that the major part of the value of Yuan would be kept unchanged and the remaining would be left fluctuating as per market requirements, still holding substantial part under regulation. After the announcement, the Yuan slightly appreciated by 0.7% in July last week.
As on September 17, the Chinese value appreciated by 1.63% as compared with the base of pegged value of ¥6.83 a dollar before depegging. This was nowhere near to the anticipated appreciation of 20% by the IMF in its letter issued during the G-20 ministerial meeting. The west is still looking for the appreciation of Yen, as if it is the only solution left for rebalancing the global economy.
Sixteen-nation Euro zone region chairman Jean-Claude Juncker said on Sept 17 that he would meet the two Chinese policy makers on Oct. 6 in Brussels to discuss exchange rate issues and monetary policy. The EU appreciated the China announcement of flexible Yuan in June, but felt progress in implementation is slow.
Unless one sees the internal contradictions and their dynamics and influences on the external front existing in their own economies, looking for external reasons for the problems of growth-oriented economies may not be fruitful as expected. Even as the discussion of Yuan’s appreciation is still on the table, the EU started criticizing the Japan govt.’s decision to intervene and weaken the Yen value. After Yen, what currency is to be blamed?
By the way, is anybody worried about the vast trade deficits of developing countries with the US and the Western European Countries?
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