The Upsides of Currency Manipulation: How China Survived the East Asian Crisis of 1997-8

Abstract

For more than a decade, the United States has spearheaded the efforts to pressure China to appreciate the yuan versus the dollar. China’s exchange rate regime has been accused of as manipulative and dishonest, as Beijing has sought to keep the yuan at a rate of between 10 and 40 percent under its supposed value. China’s devaluation of the yuan has not only undermined its Asian neighbors’ export growth; it has also widened significantly the current account gap between the United States and China over the past decade, burdening the US economy with an ever-increasing trade deficit. I argue that despite the inconvenience caused to the East Asian economies and to the United States’ economy in the past decade, China’s currency manipulation has been favorable and advantageous to its own growth. Specifically, I analyze how useful China’s exchange rate policy was before and throughout the East Asian crisis of 1997. My conclusion is that without China’s currency manipulation, it is possible that China would have been hit much harder by the financial crisis, such that it would have taken it much longer to emerge into the world’s globalized economy as a leading player. I discuss China’s motivation for currency manipulation in the context of its desire to avoid social and political unrest.

Keywords: Asian Financial Crisis, Currency Manipulation

JEL Classification: Z00