Undergraduate Economics AssociationStudent Presenter: James Teruya(3/18/14)

Undergraduate Economics Association

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Student Presenters

Undergraduate Economics Association

Present on a real-life economic situation Last year case: Cyprus Bankruptcy You can form your own teams or we can assign

you one You get the case on April 1st You will have two weeks to prepare You present on April 15th

Impress your professors!

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Case Competition

Undergraduate Economics Association

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Case Competition

Deadline: 3/31/2014

Undergraduate Economics Association

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Student Writers & Article Competition Once every semester Winner chosen by pre-defined criteria Students are given certificate and an award

Article Competition Write Economics related articles Full discretion Articles are edited & proofread

Student Writers

Undergraduate Economics Association

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Event

China’s Currency Policy

Economic ConceptsFixed Exchange

Central Bank Buys and Sells Own Currency to maintain the exchange rate

Floating Exchange No intervention by the Central Bank

Managed or “Dirty” Float Some intervention by the Central Bank

History Prior to 1994 Dual Exchange System

After 1994 Pegged to the Dollar

From 2005-2008 Allowed to Appreciate

Appreciation Halted in 2008 due to the crisis

Resumed Appreciation in 2010

Pre 1994: Dual ExchangeOfficial Fixed Rate

5.77¥/$

Market-based rate used by importers and exporters 8.70¥/$

1994-2005: Fixed Exchange

2005-2008: Managed Float

2008-2010: Appreciation Halted

2010 Forward: Appreciation Resumes

Effects: Helps US consumers and producers that use

Chinese-made parts

Hurts import-competing firms and exporters

China’s Purchases US debt with their US currency reserves

Are the rumors accurate?Exchange Rate accounting for inflation

Consumer price inflation around 31% higher than US.(June 2005- June 2013)

42% appreciation in real terms34% appreciation on a nominal basis

Trade weighted index (Effective Exchange Rate)Appreciated by 8.2% against other trading

partners (July 2008- May 2010)Appreciated by 16.9% (June 2010- May 2013)

The Current DebateChina “manipulates” its currency.Pegging can no longer be justified given the

size of China’s economyUndervaluation has been a major factor behind

the trade deficitAlso seen as a factor in high unemploymentEvidence found in foreign exchange reserves

Arguments for RevaluationCurrency flexibility would help reduce global

imbalancesRevaluing the RMB would improve economic

efficiencyHigh level of imported inputs that are

assembled in China result in little effect on trade flows

Arguments against It would hurt consumers and producers that

use Chinese-made products Lessen the Chinese government’s need to buy

US treasuriesExchange rates are only one factor that

determine flows

So what if the RMB appreciates? Winners: U.S. Exporters and Import-

Competitors

Losers: U.S. Consumers, Certain Producers and Borrowers

Questions?

ReferencesUnited States. Congressional Research Service. China's Currency Policy: An Analysis of the Economic Issues. By Wayne M. Morrison and Marc Labonte. N.p., 22 July 2013. Web. 14 Mar. 2014. <https://www.fas.org/sgp/crs/row/RS21625.pdf>.Picardo, Elvis. "Why China's Currency Tangos With The USD." Investopedia. N.p., 12 Feb. 2014. Web. 14 Mar. 2014. <http://www.investopedia.com/articles/forex/09/chinas-peg-to-the-dollar.asp>.