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Dollar Renminbi

Posted By Don Boudreaux On April 3, 2010 @ 3:03 pm In Balance of Payments,Monetary Policy,Prices,Seen and Unseen,Trade | Comments Disabled

Here’s a letter to National Public Radio’s Alex Blumberg:

Mr. Alex Blumberg, Planet Money
NPR

Dear Mr. Blumberg:

Reporting today on the alleged undervaluation of the Chinese renminbi, you said “So this is the charge: The Central Bank of China is creating additional renminbi for the sole purpose of keeping it undervalued” (“China’s Currency Distortion Affects U.S. Workers [1]“).

That is indeed the charge, but you accept it too uncritically.  In fact, the Central Bank of China keeps the renminbi pegged to the dollar, with each renminbi priced at just under 15 cents ($0.147 to be more precise).

Given the world’s increasing trade with China, isn’t it possible that “the sole purpose,” or at least an important purpose, of China’s policy of pegging the renminbi to the dollar is to ease buyers’, sellers’, investors’, and entrepreneurs’ costs of transacting across China’s border?  Because this pegging eliminates significant exchange-rate fluctuations between the renminbi and the dollar, economic actors are relieved of an uncertainty that would have diminished potential gains-from-trade between the Chinese and non-Chinese – an uncertainty that would have, in other words, discouraged many otherwise worthwhile trades from being made and, hence, would have made both the Chinese and their non-Chinese trading partners, including Americans, less prosperous.

Sincerely,
Donald J. Boudreaux

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