Appreciation of the Chinese currency likely to be gradual, with widespread implications

China’s currency manipulation has become a political issue again largely due to US domestic politics. Chinese policy action is widely expected in 2010, with widespread implications for countries in Asia Pacific and the USA, but the issue is likely to remain politically charged in the long-term due to the structural nature of the trade imbalance between China and the USA.

  • Between August 2005 and July 2008, China allowed a gradual appreciation of the renminbi which rose by around 20% over the period. Since July 2008, as the country was hit by the global financial crisis, the People’s Bank of China has kept the value of the renminbi relatively unchanged, at around RMB6.83 per US$;
  • As the US mid-term election is due in November 2010, unemployment and China’s currency manipulation are becoming more important in the domestic political agenda, and pressure from the USA is growing for China to devaluate the renminbi. US Senators are pushing a bill in 2010 to stop China from ‘manipulating’ its currency by imposing duties on Chinese products;
  • China’s current account surplus fell from 9.8% of GDP in 2008 to 7.6% in 2009, while US current account deficit fell from 4.9% of GDP to 3.2% over the same period. Meanwhile, the US trade deficit with China fell to US$139.6 billion in 2009, from US$170.9 billion in 2008. However, there are concerns that these are only due to short-term factors such as the collapse of the US housing bubbles and China’s massive stimulus measures since November 2008.
Chinese exports to and imports from the USA: 2004 – 2009
US$ billion

Source: Euromonitor International from the IMF.


  • China’s trade surplus fell 76% in Q1 2010 over a year earlier, and the country ran a monthly trade deficit of US$7.2 billion in March 2010, the first time since 2004. This leads to concerns that a premature appreciation will adversely affect the Chinese export sector, which is important for job creation. Unemployment stood at 4.5% in 2009, but underemployment and hidden unemployment have become increasingly acute problems;
China’s rates of unemployment and real GDP growth: 2000-2010
% of economically active population; annual % growth

Source: Euromonitor International from the IMF and the ILONote: Data for 2010 are forecasts.

  • Export-oriented economies across Asia such as South Korea, Taiwan, Malaysia and Thailand compete with China in manufacturing exports. A stronger renminbi will make exports from these countries cheaper in relation to Chinese exports and thus enhance their competitiveness;
  • A stronger renminbi will make imported goods cheaper for Chinese consumers and thus increase Chinese demand for imports. This will benefit Japan, a major exporter of high-tech and heavy industrial products to China. It will also benefit Australia and New Zealand, both major suppliers of raw materials and commodities to China;
  • While a renminbi appreciation will help US-based manufacturers, the impact on the US business community as a whole is not clear-cut. Big American retailers, such as Wal-Mart, will face increased cost of their imported goods from China. By some estimates, Wal-Mart bought as much as US$27 billion worth of goods from China in 2009. However, they are less vocal in opposing to a renminbi appreciation because of the opportunities to expand into China;
  • Renminbi appreciation will also hit other foreign multinational companies operating in China, since their goods manufactured in and exported from China will be affected by the currency appreciation.


  • While an appreciation is widely expected in the second half of 2010, changes are likely to be gradual and carefully managed. Despite the fact that China’s export sector will be hurt in the short term, China admits that in the long term greater currency flexibility will help rebalance the economy by increasing private demand while reducing its reliance on exports for growth;
  • The greater challenge lies in the fact that China’s trade surplus with the USA reflects several structural constraints, such as high domestic savings, lack of a social safety net and an underdeveloped consumer credit market. It is unlikely that China can reduce its trade surplus with the USA by renminbi appreciation alone;
  • Meanwhile, as the USA is facing the painful adjustment of household debt reduction and de-leveraging of the financial sector in the coming years, its trade imbalances with China is likely to remain politically charged, increasing the risk of trade conflicts and protectionism.