By Vinnie Aggarwal

Whether among friends, family or businesses, the issue of money can be a sensitive topic. When disputes over money arise between the world's two most powerful countries, the complexity of the situation and the necessity for delicacy is significantly augmented. Since the early 2000s, tensions have been progressively rising between the United States and China over the undervalued renminbi - China's national currency. Remonstrations from the United States are nothing new, nor are they alone, as other countries have also complained about China's currency policy. More significant, however, is that for the Chinese, the benefits of this policy no longer outweigh its costs. Though economic incentives may have motivated the devaluing of the currency in the past, political pressures threaten to make it difficult to reverse that policy.

The renminbi is estimated to be undervalued anywhere from 30 to 40 percent, which many U.S. lawmakers and stakeholders argue boost Chinese exports over American ones.¹ Following the financial crisis, American vitriol over this policy has only increased, as the U.S. economy becomes increasingly vulnerable and looks toward exports to boost growth.² Moreover, in order to maintain this policy, the Chinese government has accumulated foreign reserves of $2.4 trillion as of December 2009, nearly $1 trillion of which is held as U.S. debt. This helps contribute to a liquidity trap scenario in which major world economies are unable to spur their economy by cutting interest rates because their rates are already near zero.³ Finally, a low renminbi is also thought to contribute to low currencies in other Asian countries competing with China, and a stronger yuan is largely expected to raise these currencies as well.⁴

In the end, however, if the renminbi is to rise, it will be because it is also in the Chinese interest to do so. Accumulating foreign reserves to maintain the undervalued currency not only gives foreign countries less flexibility, it also gives China's central bank less ability to raise its own interest rates, which has become more urgent as Chinese consumer prices accelerate.⁵ Moreover, the restructuring of the global economy following the financial crisis also makes the policy less appropriate. Prior to the crisis, China's export-driven growth was fueled in part by high demand from the American consumer. However, following the crisis, American spending and saving habits are expected to become more conservative, and China's economic growth model will have to focus on developing demand in its own domestic economy.

For an autocratic society, however, the Chinese government must be unusually sensitive to the feelings of its citizens in pursuing a policy of revaluation. To resolve the paradox of governing a communist state with a thriving market economy, instead of ideology, the Chinese government has largely built its legitimacy on economic growth and nationalist pride. Consequently, Chinese citizens are sensitive to any perceived attack on Chinese sovereignty, and it would be a political disaster should the Chinese public believe that its government bowed to foreign pressure to raise the currency. Aside from this, entrenched interest groups must also be addressed, as a stronger yuan will undoubtedly have some negative ramifications on the export industry.⁶

Discussion of Chinese currency revaluation has thus been appropriately delicate among top officials, both American and Chinese. U.S. Secretary of Treasury Timothy Geithner recently postponed the release of a report originally due on April 15 in which the Treasury Department is required by law to identify nations that manipulate their currency.⁷ At the Nuclear Security Summit, President Hu Jintao also released a statement stating that China is "implementing a managed floating exchange rate system based on principles of acting on our own initiative in a controlled and gradual manner," a promising start toward revaluation.⁸ Ultimately, it is important to remember that the renminbi is but one variable that affects U.S. and global trade. Correcting it, however, is an important step to more balanced and stable growth in the future - not just for the U.S. and China, but for the rest of the world as well.

¹http://www.iie.com/publications/papers/paper.cfm?ResearchID=1523
²The Economist, World, March 31, 2010.
³New York Times, March 14, 2010.
⁴New York Times, April 8, 2010.
⁵The Economist, April 8, 2010.
⁶The Economist, April 8, 2010.
⁷The Economist, April 8, 2010.
⁸Reuters, April 16, 2010.