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An Essay about Korean Won Exchange Rate

Direction 3:

The Impact of RMB Exchange Rate Fluctuations on Sino-US Trade.

Name

Date
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The Impact of RMB Exchange Rate Fluctuations on Sino-US Trade.

China and the United States (U.S.) have had a tense relationship for the past many

decades. Among the main issues that the two countries have been facing is the trade issues

between China and the U.S. Many scholars, economics, and states have raised concerns saying

that China’s policies are one of the ways to distort the economy and unfair competitive

advantage towards Chinese producers and exporters. Chinas’ currency policy is arguably

intended to make its exports less expensive, and imports more expensive than they would be if

the RMB currency were freely traded in the international market (Jiang, 2014). Annual United

States trade deficits with China are arguable because of undervaluing the RMB currency against

the U.S. dollar. The trade deficits have caused a significant decline in the United States

manufacturing sector and the loss of thousands of jobs in recent years in the sector alone.

There is a complex relationship between China’s currency policy and the economy of the

United States. If China’s currency is undervalued, the prices of the goods and products from

China are lowered, benefiting the United States firms and consumers of the Chinese products.

However, an undervalued RMB also limits the amount of U.S. exports to China, and the U.S.

may be affected by vast purchases of its treasury securities by China. China intervening in

currency markets caused it to accumulate substantial foreign exchange reserves, which the

United States used to fund its budget deficits and reduce its interest rates. Therefore, RMB

appreciation of the dollar is like a two aged knife (is both beneficial to the U.S. economy and

harms the U.S. economy) (Goldstein & Lardy, 2006).

In the mid-1990s, the state of China began to peg its currency at about 8.3yuan per dollar,

which is the base unit of the RMB. China kept the rate constant for 11 years in 2005 and moved
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to a managed peg system which allowed the RMB to appreciate slowly but for only three years.

During the great recession in 2008, China halted the RMB currency appreciation because of the

adverse effects of the recession on the states’ exports.

Traditionally, scholars believed that currency appreciation increases import and reduces

exports. However, contrary to the traditional theory, although RMB has been appreciated for the

past couple of years, China has recorded constant growth in its export to the United States.

Despite the trade surplus changing in 2008 because of the great recession, China’s trade surplus

has recorded constant growth. This paper will discuss the fluctuation of the RMB exchange rate

on the Sino-US trade balance, Historical data on China’s net exports and imports, historical data

on U.S. dollar exchange rates, and the role of the RMB exchange rate in the Sino-US trade

balance (Goldstein, 2004).

RMB exchange rate fluctuations

The exchange rate is the value of one currency for conversion to another. Exchange rates

mark the fair distribution of economic transactions among different countries. A country’s trade

ability can be significantly affected by fluctuations in the currency rates. There are three main

types of exchange regimes. One of the regimes is the floating exchange rate. A floating exchange

rate is also referred to as fluctuating exchange rate. This type of regime in which currency

fluctuates and adjusts itself according to the economy. An example of such a currency is the

dollar. A fixed exchange rate is a regime where a rate is maintained despite the economic

situations. An example of a currency under this class is the Yen.

The Chinese yuan has had a currency peg since 1994 keeping Yuan value low in

comparison to other nations. The effect currency pegging on trade is that Chinese exports
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become cheap and, therefore, more attractive than its rivals. After the 2005 exchange rate reform,

RMB experienced a constant significant appreciation against the U.S. dollar, but the United

States was dissatisfied with the appreciation (Goldstein, 2004). Despite all this, the renminbi is

classified as a fixed exchange rate currency and does not have a floating exchange rate.

It is usual for the exchange rates to fluctuate in the global markets. Many factors affect the

change of RMB exchange rates, such as inflation rate differential and commodity price.

The table below shows 2000 to 2022 RBM exchange rate against the United States dollars.

Average

Closing

year Price Year Open Year High Year Low Year Close

2022 6.35 6.36 6.38 6.31 6.32

2021 6.45 6.53 6.57 6.34 6.36

2020 6.90 6.96 7.17 6.52 6.53

2019 6.91 6.88 7.18 6.69 6.96

2018 6.63 6.49 6.98 6.26 6.88

2017 6.76 6.96 6.96 6.49 6.51

2016 6.65 6.53 6.96 6.45 6.95

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2015 6.28 6.20 6.49 6.19 6.48

2014 6.16 6.05 6.26 6.04 6.20

2013 6.15 6.23 6.24 6.05 6.05

2012 6.31 6.29 6.39 6.22 6.23

2011 6.46 6.59 6.64 6.29 6.29

2010 6.77 6.83 6.83 6.60 6.60

2009 6.83 6.82 6.85 6.82 6.83

2008 6.95 7.29 7.29 6.78 6.82

2007 7.61 7.81 7.81 7.29 7.29

2006 7.97 8.07 8.07 7.80 7.80

2005 8.20 8.28 8.28 8.07 8.07

2004 8.28 8.28 8.28 8.28 8.28

2003 8.28 8.28 8.28 8.28 8.28

2002 8.28 8.28 8.28 8.27 8.28

2001 8.28 8.28 8.28 8.27 8.28

2000 8.28 8.28 8.28 8.28 8.28

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The graph below is a FRED historical chart for Dollar Yuan Exchange Rate from 1985 to 2020.

China-U.S. Trade Analysis

The U.S. is the chief trading partner of China, followed by the European Union. However,

the U.S. acknowledges China, Canada, and Mexico as its dominant trade partners. The three

nations account for nearly $2 trillion worth of imports and exports annually. China's economic

and trade relations and the united states have been on rampant growth for more than 60 years.

The United States has benefited majorly from technology and equipment from China, while

China has gained from U.S. agricultural products (Qiu et al., 2019).

China and the U.S. recorded 74 billion U.S. dollars for their imports and exports in 2000.

However, the total import and export volume surpassed 100 billion yuan three years later. Since

then, due to the recession, trade declined significantly but picked up in 2010. In 2013, the two
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countries hit the $500 billion mark and grew steadily after that. Of the two countries, China has

benefited the most from their trade. China has ripped from trade volumes and revenue and

expenditure growth rate for the past 20 years.

Trump administration routinely accused China of currency manipulation. The

administration accused China of manipulation to boost its exports. To counter China, the Trump

administration set a pool of tariffs against imports from China. China, in response, also put tariffs

against the United States, and the two superpower nations went on with tariff war for quite some

time. In one way of countering the United States, China set its Yuan below its seven to one peg

against the dollar.

Despite their never-ending trade conflicts, both U.S. and China need each other. For

instance, if China completely stopped trading with the United States, China would face a

financial disaster. China will face a recession and deep damages to its domestic market since

many Chinese citizens will lose their jobs. The United States will also be hurt, and many jobs

will be lost. Stock markets would shrink, and many firms closed. However, despite the evident

challenges that the U.S. will face if China stops trading with it, the degree of damage on China

will be far too complex and incomparable to that of the United States.

China's exports and imports

           China was the U.S.' third-largest goods export market in 2020, while it was the United

states' largest supplier of goods import. The U.S. imported goods from China summed $434

billion in 2020, while U.S. goods exports to China were 125 billion dollars in the same year. The

top export categories in2020 were electrical machinery, oilseeds, soya beans, machinery, and
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medical instruments. The united states also imported services from china worth 5 billion dollars

while the U.S. export of services to china totaled up to $40 billion. 

           Averagely, the U.S. goods exports to China have been increasing by 2.4% per annum for

the past ten years as it remains the U.S. third-largest goods export market. However, as of 2019,

the European Union, Taiwan, Japan, and South Korea exported more goods to China than the

United States in 2020. The different States in America reported different amounts of exports to

China. However, the leading state is Teas, followed by California, while Oregon sealed the top

three highest export states to China. However, North Carolina, Lowa, and Alabama were the

states with the least exports to China in 2020.  

           Exports to China comprise more than tangible products; exports represent the livelihoods

of thousands of American industries. The industries range from agricultural to high-tech

manufacturing firms. China accounts for both goods and services exports. In 2019, the number of

jobs supported by exports was 916,000, which decreased from 2017s to, 1.1million jobs. More

than 16 American states recorded an increase in jobs supported by exports to China increase

while 17 states saw jobs supported by export to China fall by more than 1000, while Texas and

Washington saw a decline of more than 10,000 jobs in 2019. However, the job losses were

mainly tied to fluctuations in the specific industry sector. 

Recent on global sales shows Chinese exports grew faster than expected because of the global

COVID-19 pandemic recovery and high demand. While Chinas’ monetary policies have been

tolerating relatively big swings in their currency, the currency is still tightly managed by China’s

central banks.

Chinese Economic Reforms

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There are some transformations that aided China's recent economic development. The

transformations include; 

 Chinese initial conditions that favoring growth during the restructuring period

 Structural reforms- China has reforms that underpin its economic development.

 Implementation strategy- the Chinese authorities had a long-term vision that encouraged

economic development in the county.  

Background on China's Currency Policy

2008: RMB Appreciation Halted: China halted its currency appreciation policy during this

period mainly because of declining global demand for Chinese products.

2010: RMB Appreciation Resumes: In mid-2010, the Chinese government resumed RMB

appreciation. 

Empirical Analysis

The most commonly used technique for investigating the relationship between two

quantitative variables are correlation and linear regression. The correlation method quantifies the

strength of the linear relationship between a pair of variables. The correlation coefficient is

calculated by first determining the covariance of the variance and dividing it by the variable's

standard deviations (Hardoon et al. 2004). Correlation quantifies the direction and strength of

the relationship between two numeric numbers, X and Y, lying between -1.0 - 1.0. below is a

simple linear regression formula;

Y= a+bx.
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 a- constant

 b- variable

 x and y are the x and y variables. 

           This paper adopts regression analysis as its research method. According to Freund et al.

(2006), regression analysis is a set of statistical methods used to estimate relationships between a

dependent variable and one or more independent variables. The regression analysis can be used

to determine the probability coefficient (Fox, 1997). 

The regression equation of each influencing factor on RMB exchange rate is obtainable using the

least square method:

Y=-0.5413x1 + 0.1221x2 - 0.2433x3 + 0.013x4 + 0.4736x5 – 6.3465

From the regression equation, the following data and conclusions are achievable.

 The export elasticity of both China and the U.S. is equal, meaning that appreciation of the

RMB will insignificantly affect Sino-US exports.

 The U.S. income level impact is more significant than that of the exchange rate and

income level is higher than the influence of Sino-US exchange rates of the two countries.

 The payment balance is negatively correlated with exchange rate of the US dollar against

the RMB. There is also a positive correlation between the GDP and the US dollar.
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 There is a positive correlation with the exchange rate of the US dollar against the RMB

meaning that U.S. dollar against the RMB rises with an increase in foreign exchange

reserve.

 Commodity prices and US dollar exchange rate against RMB have a negative correlation.

When prices of goods in the international market fall, the US dollar also falls.

Comparison between Correlation and Regression

 In correlation, there is a non-difference between the dependent and independent

variables. However, in regression analysis, both variables are different. 

 Correlation describes a linear relationship between two variables, while regression

estimates one variable based on another variable. 

           The RMB has different impacts on China's trade balance. Different scholars and

researchers have done empirical studies on international trade between countries and come

up with different views pertaining exchange appreciation. Traditionally there were dynamic

linkages between exchange rate and international trade flows. Depreciation of currency

makes exports cheaper and imports costlier, significantly impacting international trade. On a

study on trade performance in Asian countries, findings were that currency volatility has a

less negative impact on trade performance; however, U.S. exports to China increase with the

appreciation of RMB, but China's exports to the U.S. is not affected as the effect of

real exchange rate on overall trade. However, the exchange rates have always been a

sensitive subject in international trade due to their relations with more than one source.

Policy Recommendations
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 The trade surplus between China and the United States cannot be directly reduced by

substantially appreciating the RMB exchange rate since it has almost no practical,

theoretical basis. To effectively solve the Sino-US trade issues and imbalances, we

cannot solely rely on the appreciation of the RMB exchange rate. 

 In trying to solve the trade issues between China and the U.S., the United States must

realize that appreciating the RMB will reduce China’s investment and exports to the U.S.

and affect America’s income and savings. Therefore, the U.S. must focus much of its

effort on adjusting its domestic consumption rather than putting all effort into the

exchange rate. 

 The United States should act towards liberalizing strict controls on its exports to China,

which will, in turn, reduce the Sino-US trade surplus rather than putting all blame on the

RMB exchange rate issue. 

 Even though the RMB exchange rate significantly affects China-US trade, its influence is

very minimal because the marginal added value is relatively high.

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Conclusion

For a long time now, China and the United States (U.S.) have had a tense relationship.

Among the main issues that the two countries have been facing is the trade issues between China

and the United States. Chinas’ currency policy is arguably intended to make its exports less

expensive, and imports world expensive than they would be if the RMB currency were freely

traded. There is a complex relationship between China’s currency policy and the economy of the

United States. If China’s currency is undervalued, the prices of products from China are lowered,

benefiting the United States firms and consumers of the Chinese products. Although RMB has

been appreciated for the past couple of years, China has recorded constant growth in its export to

the United States.

Despite their never-ending trade conflicts, both U.S. and China need each other. There

are some transformations that aided China's recent economic development. The transformations

include; Chinese initial conditions that favoring growth during the restructuring period,

Structural reforms- China has reforms that underpin its economic development and

Implementation strategy- the Chinese authorities had a long-term vision that encouraged

economic development in the county. 

When the RMB exchange rate fluctuates, it is imperial to find the causal factor for the

fluctuation. When the causal factor is determined, we take efficient measures to solve the issue.

The trade surplus between China and the United States cannot be directly reduced by

substantially appreciating the RMB exchange rate since it has almost no practical, theoretical

basis. It is usual for the exchange rates to fluctuate in the global markets. Even though the RMB
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exchange rate significantly affects China-US trade, its influence is very minimal because the

marginal added value is relatively high.

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References

Fox, J. (1997). Applied regression analysis, linear models, and related methods. Sage

Publications, Inc. https://psycnet.apa.org/record/1997-08857-000

Freund, R. J., Wilson, W. J., & Sa, P. (2006). Regression analysis. Elsevier.

https://books.google.com/books?

hl=en&lr=&id=Us4YE8lJVYMC&oi=fnd&pg=PP2&dq=regression+analysis&ots=WVJl

9GSg3k&sig=FFZjgd0PTdOh5jClyNwg3B73uwE

Goldstein, M. (2004). Adjusting China's exchange rate policies. Available at SSRN 578903.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=578903

Goldstein, M., & Lardy, N. (2006). China's exchange rate policy dilemma. American Economic

Review, 96(2), 422-426. https://pubs.aeaweb.org/doi/pdf/10.1257/000282806777212512

Hardoon, D. R., Szedmak, S., & Shawe-Taylor, J. (2004). Canonical correlation analysis: An

overview with application to learning methods. Neural computation, 16(12), 2639-2664.

https://ieeexplore.ieee.org/abstract/document/6788402/

Jiang, W. (2014). The effect of RMB exchange rate volatility on import and export trade in

China. International Journal of Academic Research in Business and Social

Sciences, 4(1), 615. http://citeseerx.ist.psu.edu/viewdoc/download?

doi=10.1.1.685.5927&rep=rep1&type=pdf
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Qiu, L. D., Zhan, C., & Wei, X. (2019). An analysis of the China–US trade war through the lens

of the trade literature. Economic and Political Studies, 7(2), 148-168.

https://www.tandfonline.com/doi/abs/10.1080/20954816.2019.1595329