China’s Renminbi: “Our Currency, Your Problem”

Our Currency, Your Problem is a case involving the issue of exchange rate regimes and the impact currency manipulation has on economies and trade. The United States and Europe argued that the Renminbi (RMB) was undervalued and claimed that the People’s Bank of China (PBoC) deliberately manipulated the exchange rate to lower the prices of exports, which caused the US and Europe to run huge trade deficits with China.
The US and Europe felt that the RMB was undervalued for several reasons. One reason is that China’s exports had dramatically increased, growing 30% from 2004 to 2005, making China the third largest exporter in the world and accounting for
After absorbing foreign currencies in circulation, the PBoC reinvested these funds in US treasury bonds and stockpiled US debt in order to maintain the peg to the US dollar against natural market forces. Maintaining an undervalued exchange rate also allowed China’s economy to continue to grow. Foreign Direct Investment in China grew from $4.4B a year to $63B a year from 1991 to 2006. For every one dollar earned China would put 8RMB into circulation. This over supply of RMB also maintained the RMB artificially low. However, over time this policy of excess money could lead to inflation. China combatted inflationary pressures by issuing bonds thus removing excess RMBs and by imposing tighter liquidity ratios on banks.
On July 2005 China reluctantly reformed their exchange rate regime. The renminbi was revalued by 2.1% to RMB8.11 to the US dollar. The peg to the US dollar was dropped and replaced by a peg to a basket of currencies. However the basket was predominately represented by the USD, the Euro, and the Yen. Despite this reform the US continued to lead international efforts in pressing for greater acceleration of the renminbi’s revaluation as trade deficits with China continued to increase. The Chinese claimed that if a major revaluation took place, such as 15%, it would level their exports causing a contraction in exports. Such dramatic measures would surely