China: Currency and United States Essay

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Assignment 1
Carsen Graves
12/2/13
ECO 344

Carsen Graves
12 February 2013
Roland Bushell
International Economics
The Rise of China In the last 30 years China has made unprecedented economic advancements. This climb as been astounding and, while some see it as a sign of progress being made in the “global-south”, many characterize this ascent as a threat to the “global-north.” China’s economic growth has placed them at number two in the global economic rankings, second only to the United States. The fairness and validity of this massive growth spurt has been questioned, however. The Chinese government has used tactics, such as planned revaluation of the Yuan, to maintain and even increase the export of goods made cheaper by the devaluing of the national currency relative to the rest of the world (Zhang). The severity of these allegations was compounded when the communist Chinese government was accused of reporting false numbers with regards to their exports (Chang). While Wen Jiaboa denies any wrong doing on the governments part, the rest of the world stands by astonished by the Chinese rise to power, questioning the implications of such a massive economical expansion, especially of a communist government. China originally began reevaluating their economic approach in the mid-1980s, when Deng Xiaoping, the Chinese Premier at the time, established relations with the United States and began his “open-door policy” ("China Profile"). This new policy opened china up to foreign investors, encouraging the private sector to expand. By opening trade to the rest of the globe rather than being restricted to the USSR and satellite countries, China was able to grow its economy at an unparalleled rate (“Open Door Policy”). This growth is evident in the swelling of the numbers of Foreign Direct Investment or FDI.
“FDI was virtually nonexistent in the decades preceding 1979. In 1983, the flow of foreign investment was a mere U.S. $1.7 billion. It increased to $5.3billion in 1988,and to $11.4 billion in 1991. Accumulated FDI from 1979 to 1992 (calculated without depreciation) reached $34.5 billion. [In] terms of the source of FDI, Hong Kong is by far the absolutely dominant supplier” (Wei).
By 1992 the Chinese economy had grown drastically, and the International Monetary Fund (IMF) ranked their economy as the third largest in the world, behind the United States and Japan.
China’s economy continued to flourish, as did the manipulation and intervention with regards to the national currency. “China [abolished] the official renminbi (RMB) currency exchange rate and [fixed] its first floating rate since 1949 (“China Profile”).” In July of 2005 China revalued the Yuan by 2.1% for the first time in seven years due to intensified pressure from the international community and after John Snow, the United States treasury secretary, warned that he was going to issue a report to congress accusing China currency manipulation (Zhang, Friedberg). China also allowed to Yuan to appreciate in 2010 just before the G-20 summit, in an attempt to avoid criticism as other nations were preparing to confront the country regarding its interference with currency appreciation (Friedberg). While this was progress, trade partners, most importantly the United States, expected a more drastic changes on a permanent basis, rather than temporary Band-Aids to avoid international disparagement.
Hilary Clinton, the Secretary of State in the Obama administration, attempted to strengthen relations with the Chinese in 2009 while also encouraging further revaluation (“China Profile”). In 2010 “China’s central bank said that it would ‘allow the country’s currency to float more freely against the dollar and other foreign currencies’ (Richburg and Pomfret). Since then, the Yuan has inched up at a glacial pace, rising only 5.5% through June 14, 2011” (Scott). Economic research has found that, to match the amount of appreciation of the Yuan
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