The Undervaluation of the Yuan Dispute: Is a Repetition of Germany's Experience in 1969 Necessary, Inevitable or Desirable? A Comment and Reply to John A. Tatom
The present article is a reply to the article by John A. Tatom titled ``The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?," recently published in this journal. We found that John Tatom seems to only give a partial description of the US-Chinese economic relations, of the main features of the Chinese economy, and also of the macroeconomic policy options available to China. We argue that the real exchange rate is not the appropriate measure for a currency undervaluation, but it is the continuous, one-directional and accelerating accumulation of foreign exchange reserves. We also argue that the likely improvement in the US trade balance deficit caused by an appreciating Yuan will not be offset by growing US trade balance deficits with other East Asian countries. Furthermore, giving up the actual currency peg will benefit rather than harm China, provided that the steps towards Yuan flexibility will be taken in the right sequence and order. We hold that a revaluation of the Yuan is necessary, inevitable and desirable just as much as it happened to be with the Deutschmark in 1969. It would not ``damage Chinese development." China needs a Yuan appreciation mainly in its own interest to assure domestic financial market stability, and to avoid an overheating of its economy and a soaring inflation.
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- John A. Tatom, 2007. "China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?," NFI Working Papers 2007-WP-24, Indiana State University, Scott College of Business, Networks Financial Institute.
- Tatom John A, 2007. "The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?," Global Economy Journal, De Gruyter, vol. 7(3), pages 1-15, October.
- Friedrich L. Sell, 2001. "Contagion in Financial Markets," Books, Edward Elgar Publishing, number 2277.
- Friedrich L. Sell, 2007. "Anticipated effects of foreign currency reserve diversification in Asian countries: Do China and India matter for coordination?," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(1), pages 32-38, 04.
- Tatom, John, 2007. "China currency dispute: is a rise in the yuan inevitable, necessary or desirable?," MPRA Paper 5366, University Library of Munich, Germany.