Chapter 3 Case Study: The Revaluation of the Chinese Yuan
For nearly a decade, China had pegged the yuan on the U.S. dollar (USD) at 8.28 yuan/$ as part of its trade strategy. In the mid-2000s, the U.S. had begun to pressure China to revalue the yuan, arguing that the Chinese currency was overvalued as demonstrated by the large and still increasing Chinese trade surplus with the U.S. While the U.S. had encouraged a revaluation of between 10% and 20%, there were different opinions in debate in reference to the amount of revaluation of the yuan or whether the revaluation should be acted upon at all. When the U.S. government threatened to impose tariffs on Chinese imports, China was put into a difficult position in which the country no longer had much choice in the matter of revaluing the yuan.
There were advocates for, “stay the course” philosophy, and opponents of, “pro-revaluation” philosophy, the revaluation of the yuan throughout both China and the U.S. Still, the revaluation was ultimately decided in a meeting at the People’s Bank of China. Though the U.S. had considered a 20% revaluation ideal, China ended up changing the yuan in a revaluation of 2.1%, transitioning the country’s exchange system from a peg on the U.S. dollar to a managed float. This number was much lower than expected and many critics in both countries feared that if the revaluation was too small, it would possibly lead the currency toward more instability. To prevent this, China allowed the yuan a 0.3% fluctuation in value per day. This small allowable fluctuation would be crucial to protecting shareholders’ investments as well as facilitating the beginning of a minimal float regime and would not affect the possibility of appreciation of the yuan against other currencies.
This revaluation pleased the U.S. as it created a trade environment conducive to increasing exports while also serving to reduce the cost of goods sold, which helped corporations selling to...