Currency Revaluation the Increase World-

Currency Revaluation

The increase world- wide competition from China in the Global economy has been the result of the slogan that is attached to Chinese products that says that "we are the cheapest." China has been involved in the production of products that range from a small safety pin to large trucks for industrial use. The main advantage rests with the Chinese economy growing at rapid rates while the biggest importers of Chinese products which include United States and United Kingdom have been worried due to their economies suffering because of the Chinese goods being the cheapest. United States and United Kingdom have been involved in arguments to revalue the Chinese currency as in accordance with their opinion, the Chinese currency is undervalued and it is the time to revalue the Chinese currency.

The basis of their argument is that China has been able to offer cheap goods and offer intense competition in the world markets with an attempt to keep its currency undervalued. The basis of their argument is the Purchasing Power Parity Exchange Rate (PPP) and macroeconomic balance. On the basis of these two concepts it could be proved that Chinese currency is undervalued.

The macroeconomic balance approach argues that the international reserves of the country shall not change or shall change only by a small amount if its currency is valued at the equilibrium. Comparing this situation to that of China shows a clear under valuation of the Chinese currency as China has continuously experienced a sharp increase in its reserves. During the first quarter of 2011 Chinese forex reserves increased by $138 billion which shows that its exchange rate is not in line with the macroeconomic balance approach of currency valuation.

Another argument put forward on the basis of extended PPP exchange rate (Madura 2009). It argues on the basis that real prices of goods and services in U.S. And China shall be the same based on the real exchange rate of the two countries. These were the reasons on the basis of which undervaluation of the Chinese currency is argued.

United States and United Kingdom intend the revaluation of Chinese currency due to the fact that their current account deficit with China is on the increase and the intense competition from China threatens their job market extensively as cheap Chinese products means that industry in these countries suffer as industries find it difficult to cope up with their current sales volumes.

But it shall be noted that only currency revaluation is not the only solution and such revaluation might not be of any advantage to these countries. There are strong reasons present for justifying the current exchange rate of the RMB.

Firstly, it cannot be proved with proper evidenced that RMB is undervalued. In order to prove that the RMB is undervalued there should be a proper statistical report which shows the exact under valuation of the Chinese currency (Baumol & Blinder 2011). The problem exists due to the fact that there are too many researches, each showing a different numerical value showing the under valuation of currency. There is no proper method that is devised for the calculation of undervaluation of RMB.

Secondly, it could also be argued that United States and United Kingdom will not benefit in the long run due to the revaluation of the RMB. This is due to the fact that the real effect of prices in the two countries will move the exchange rate to the previous equilibrium. But in the short run countries trading with china will benefit from the revaluation of RMB. Other factors such as cheap labor and raw material prices also contribute to the cheap value of Chinese goods rather than only currency valuation. Even if the RMB is revalued, and consequently China retaliates through tariffs on the import of goods than this would not benefit United States and United Kingdom, as tariffs would increase the prices of these goods in the Chinese markets. Another measure that the Chinese government could resort to in case of revaluation of RMB is the provision of subsidiaries to its industries. This means that even if the Chinese goods become expensive in the international market on the basis of higher exchange rate of RMB, its effect could consequently be eliminated by the provision of subsidies (Corden 1994). This would decrease the cost of production which means that prices of these goods experience a decline and once again cost the consumers as in the pre-revaluation period.

Another reason for not revaluing the RMB is because the revaluation of RMB will decrease Chinese exports which mean that Chinese national income experiences a fall resulting in a fall in U.S. imports which would consequently cause negative effects on U.S. And UK exports on china. The revaluation of RMB could also mean that Chinese manufacturers cut their margins which would not affect the prices of Chinese goods. And if china loses its share in U.S. exports due to RMB revaluation, than there is a possibility that other low cost producers such as India and Bangladesh might take over.