Question

Critically comment on the following statement as they refer to middle-income developing countries:

"China has had large current account surpluses, this is proof enough that Chinese authorities have been manipulating the value of the renminbi to attain an unfair advantage in international markets"

Answer 1

China is a net exporter and its exports are more than its imports and due to more exports and than imports it earns foreign currency and resultantly it has current account surplus with most of the countries, i.e. USA, India, etc.

To maintain its export competitiveness and its current account surplus it often manipulates renminbi and devaluates its currency vis a vis other foreign countries currencies, i.e. USD and due to that its exports become cheaper to the rest of the world and become competitive in the international market and by doing this it maintain its current account surplus with the rest of the world and China uses this surplus of foreign reserve to pay for its imports but as its imports are less than its exports it always maintain high level of foreign reserves and resultantly current account surplus.

China influences its currency renminbi in the international market by influencing its exchange rate in comparison to other foreign currencies in order to make its exports competitive in the international market.

Due to above policies China has made its economy a export led economy and attained export led growth since its reforms which started during 1980's after adoption of model of social market economy.