Chinese Currency Debate on Senate Floor

Today, the Senate is continuing debate on the Currency Exchange Rate Oversight Reform Act of 2011,which would impose tariffs on exports from countries with undervalued currencies. Although the word “China”‘ does not appear in the text, the bill is clearly directed at the Renminbi’s (RMB) exchange rate. Fueling tensions, the Financial Times reports that China has just put the breaks on the RMB’s appreciation against the dollar (subscription required to access article).

China has gradually relaxed its tight grip on the exchange rate, with the Congressional Research Service reporting, “From July 2005 to July 2008, China’s central bank allowed the RMB to appreciate against the dollar by about 21%.”  There is general agreement among economists that the value of the RMB is artificially low. There is less agreement with respect to how much of an impact this has on the U.S. economy and how the U.S. should respond. Paul Krugman has singled out China in arguing that the U.S. “should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit.” Opponents of the proposed legislation, such as a coalition of business groups, see the bill as ineffective and even counterproductive. For a thoughtful discussion of the issues, including an analysis of the domestic Chinese context, see Arthur Kroeber’s article for Foreign Policy titled, “The Renminbi: The Political Economy of a Currency.” In particular, China’s export-friendly exchange rate policy is being reconsidered because an undervalued exchange rate can create inflationary pressures at home.

In case any of you are wondering what “Renminbi” means, it literally means the “people’s currency.” The word “yuan,” which is often used in reporting on China’s currency, is the base unit, like “dollar” in the United States. While George Washington only has his face on the one dollar bill, Mao Zedong is pictured on all notes.

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