Impact of Renminbi Appreciation on China\'s Trade

RMB

The Chinese currency was selected as the focus of this study for several reasons. The primary reason behind this selection is the rising importance of the Chinese currency's valuation compared to other major world currencies. This is because of China's already large and still-growing trade presence in all global markets and the artificial nature of its currency's valuation, as the government manipulates the exchange rate for the Renminbi by tying it to certain other currencies rather than allowing it to "float" with market forces as do most other countries in the developed and developing world (India Times 2010). Despite this artificial hold on the currency, however, the Renminbi has been allowed to appreciate in value at an increasing rate, and this is beginning to have an effect on the significant trade surplus that the country has long maintained (India Times 2010). The fact that China is the world's second largest economy is the reason behind the importance of the Renminbi's valuation, and thus part of the major reason why this currency was selected for study.

The nature of China's economy and its control over its currency was also a significant reason for making this currency and its appreciation the focus of my study. China's transition form a planned economy to a market economy did not occur with a crash and a drop in economic subsistence, but rather has itself been the result of careful centralized economic planning (Lin 2004). This transition is unique in the economic history of mankind, and the slow appreciation of the Renminbi is a major part of the Chinese government's control over the country's economy (Lin 2004). This makes for research that is both highly interesting and entirely novel.

Finally, the economic events of the past several years and the effects that they have had on China's trade surplus and on the value of the Renminbi make the study of this currency's appreciation especially timely. The global recession demonstrated the problems that are associated with the lack of appreciation of China's currency, for the major economic powers in the world as well as for China itself, and the 2009-2010 period demonstrated an increase in the pace of the Renminbi's appreciation that enables a greater certainty in comparisons to China's trade surplus (Ming 2010). That is, appreciation has occurred quite slowly over the past several decades, and the lack of radical shifts can make it difficult to ascertain a definite link between currency appreciation and trade levels, meaning that the events and changes of the past few years have enabled a greater study with a greater degree of certainty in conclusions to be reached in comparing value and trade (Ming 2010).

The methodologies utilized in this research include a variety of different approaches to the problem, as developed through previous literature both directly related to the research questions and providing general information and context to the economic issues inherent to the situation. There are several different applicable economic models from which the appreciation of the Renminbi and its relationship to China's trade surplus can be analyzed, and the determination and selection of appropriate models was a major part of the research methodology. The models eventually utilized to provide the data for this research were selected on the basis of their proven applicability in previous research (Cerra 2008; Bahmani 2009).

The first model applied as a means of analyzing the raw data presented by currency values and trade levels is the partial equilibrium model, which examines the equilibrium between supply and demand and how this equilibrium is impacted by exchange rate fluctuations on foreign trade markets (Cerra 2008). With other factors influencing supply and demand excluded from the analysis, it is possible to draw a more focused and meaningful conclusion regarding the impact that currency value differences has on trade levels (Cerra 2008). As this was the primary research question focused on in this study, the partial equilibrium model was deemed especially appropriate as a means of preliminary analysis.