Renminbi Case

662, Case 3 1. Do you think the Renminbi is over look ond against the US sawbuck? 2. Why does the Chinese government want to keep its currency at an artificially low level against the US Dollar? What is the risk for mainland chinaw atomic number 18? For the US? 3. What would be the consequences of a 20% critical review (increase in the value of the Renminbi) for mainland china, western countries, Japan, and developing countries? How would it impact workers, exporters, and importers in chinaware? Various studies claim suggested that the RMB is undervalued, with recent estimates ranging from 15-50 percent.The greatest beneficiary from a gradual RMB recap, accompanied by measures to stimulate demand, give be China itself. Its growth is likely to be more balanced and resilient, and that will have a positive spillover on the rest of the world, including by reducing currency and trade tensions. RMB revaluation causes a loss to consumers outside China since they will confront highe r impairments of goods merchandise from China. These losses have to be offset against those of producers who will gain competitiveness.Moreover, Chinas trading partners are more likely to gain from RMB revaluation if it comes with measures that accelerate Chinas domestic demand relative to its GDP. Indeed, without those measures, the instal of RMB revaluation on Chinas current account intemperance is likely to be marginal or even to widen it. In the very long run, a revaluation of the RMB could help commodity-exporters to diversify into elementary manufacturers. However, over the next few years, RMB revaluation is unlikely to affect these countries exports importantly because the prices of their commodity exports are determined in global markets (and denominated in long horses).However, the dollar prices of Chinas exports to those countries are likely to rise, reflecting small profit margins in those sectors and the fact that China, as the biggest exporter of those goods, is t he price-setter. any(prenominal) middle-income manufacturing exporters running a trade redundant with China will benefit, too. Other middle-income exporters that import a lot from China could be net resortrs from the hike in Chinas export prices in the short term, but gain as their export volumes brandish at Chinas expense.Low-income commodity exporters will generally be net losers from RMB revaluation alone and will only benefit if Chinas growth accelerates because of accompanying measures taken by the Chinese authorities. Some high-income countries, such as Germany and Japan, which have an initial small trade shortage with China, may lose or gain a little from RMB revaluation alone. However, countries such as Italy and the linked Stateswhose initial trade deficits with China are bear-sized and whose exports are not competitive with Chinaswill very likely lose, and their lower-income consumers will suffer most as the price of Chinese goods rises.This conclusion does not impl y a judgment that a large bilateral trade deficit in Italy and the United States with China is good or bad. It only implies that RMB revaluation is not the way to raise the deficit problem. Instead, increasing national savings rates in Italy and the United States, and increasing consumption in China would be more effective. given over Chinas high dependence on price-sensitive exports, a large one-time RMB revaluation may carry unacceptable risks to its growth and stability. In the case of a sharp slowdown in China, those countries that are likely to lose from RMB revaluation anyway, starting with the United States.