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Renminbi Undervaluation, China's Surplus, and the US Trade Deficit

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  • William R. Cline

    () (Peterson Institute for International Economics)

Abstract

The impact of China's exchange rate on both its current account balance and the US-China bilateral trade balance is considerable. A 1 percent rise in the real effective exchange rate would cause a reduction in China's current account surplus of 0.30 to 0.45 percent of GDP. A 10 percent real effective appreciation would bring China's current account surplus down by roughly $170 billion to $250 billion annually with a corresponding improvement in the US current account balance ranging from $22 billion to $63 billion annually. William R. Cline also warns that the increasing trend for China's current account surplus, combined with the negative trend for the US deficit, indicate that adjustments accomplished through exchange rate correction at any one time will have a tendency to erode unless the renminbi successively appreciates by around 2 percent annually to reflect its rapid productivity growth. Special Chinese efforts to shift the economy away from external to domestic demand are important complements of exchange rate adjustment, without which the long-term trend toward a rising trade surplus could cause excess demand to grow and increase inflationary pressures on the economy.

Suggested Citation

  • William R. Cline, 2010. "Renminbi Undervaluation, China's Surplus, and the US Trade Deficit," Policy Briefs PB10-20, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb10-20
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    Cited by:

    1. Wolfgang Keller & Ben Li & Carol H. Shiue, 2011. "China’s Foreign Trade: Perspectives From the Past 150 Years," The World Economy, Wiley Blackwell, vol. 34(6), pages 853-892, June.
    2. Raphael A. Auer, 2015. "Exchange Rate Pass‐Through, Domestic Competition, and Inflation: Evidence from the 2005–08 Revaluation of the Renminbi," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1617-1650, December.
    3. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
      [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
      ," MPRA Paper 51332, University Library of Munich, Germany.
    4. Pedro Bação & António Portugal Durate & Mariana Simões, 2013. "The International Monetary System in Flux: Overview and Prospects," GEMF Working Papers 2013-07, GEMF, Faculty of Economics, University of Coimbra.
    5. Morris Goldstein, 2011. "Integrating Reform of Financial Regulation with Reform of the International Monetary System," Working Paper Series WP11-5, Peterson Institute for International Economics.
    6. Ana Cardoso & António Portugal Duarte, 2015. "The Impact of the Chinese Exchange Policy on Foreign Trade with the European Union," GEMF Working Papers 2015-09, GEMF, Faculty of Economics, University of Coimbra.

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