Author : Vivan Sharan

Issue BriefsPublished on Aug 23, 2023 PDF Download
ballistic missiles,Defense,Doctrine,North Korea,Nuclear,PLA,SLBM,Submarines

China’s Monetary Dilemma: The Case for Revaluation of the Renminbi

Increasingly, the Chinese are realising that keeping their currency undervalued is not a viable option. The end game as far as the exchange rate management in China is concerned should look towards establishing a less controlled and more market oriented exchange rate-one that is determined by actual demand and supply factors.

Meticulous planning and control have been pivotal in the way the Chinese have managed their economic trajectory since Mao Zedong proclaimed the founding of the People’s Republic of China in 1949. The new government formed after the defeat of the Chinese Nationalist Party, tried to curb the existing inflationary pressures in the economy by centralizing the foreign exchange management. China opened its economy in 1978 and has since tried to combine market reforms and central planning to achieve economic growth and stability.

China’s role in the existing financial architecture of the world can hardly be understated. Currently, the Chinese markets are the primary driving force for global commodity prices. The huge investment demand in China is only going to grow larger in the coming years, even if there is a deliberately engineered “soft
landing” to prevent overheating of the economy by the Communist government. This demand for raw materials and manufactured goods alike is going to be vital in order to mitigate chances of another global recession; a veritable “double dip”.

Consequent to China’s rise in the new economic world order, its currency, the Renminbi, has
attracted a lot of criticism for being undervalued relative to other currencies, especially the US Dollar. This undervaluation equates to more competitive exports for the Chinese. A bulk of the criticism has come from Western nations, struggling to keep pace with the close to double digit growth rates in the emerging world. Opinion is divided amongst economists and commentators on whether the criticism is wholly valid or only partially so.

There is no doubt that China is not playing according to the rules of the free market, but in the context of the recent global financial crisis, few are. Increasingly, the Chinese are realising that keeping their currency undervalued is not a viable option. However, this is because of different reasons than the ones stated above. It is worthwhile examining the current context with a background history of the control over the Renminbi’s exchange rate.

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Vivan Sharan

Vivan Sharan

Vivan was a visiting fellow at ORF, where he supports programmes on the ‘new economy’. Previously, as the CEO of ORF’s Global Governance Initiative, he ...

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