The Undervaluation of the Yuan Dispute: Is a Repetition of Germany's Experience in 1969 Necessary, Inevitable or Desirable? A Comment and Reply to John A. Tatom

Global Economy Journal, Vol. 8, No. 2, Article 7, 2008

Posted: 15 Feb 2015

See all articles by Beate Sauer

Beate Sauer

University of the German Federal Armed Forces - Universität der Bundeswehr München

Friedrich L. Sell

University of the German Federal Armed Forces - Universität der Bundeswehr München

Christian Oberpriller

Independent

Date Written: 2008

Abstract

The present article is a reply to the article by John A. Tatom titled “The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?,” recently published in this journal. We found that John Tatom seems to only give a partial description of the US-Chinese economic relations, of the main features of the Chinese economy, and also of the macroeconomic policy options available to China. We argue that the real exchange rate is not the appropriate measure for a currency undervaluation, but it is the continuous, one-directional and accelerating accumulation of foreign exchange reserves. We also argue that the likely improvement in the US trade balance deficit caused by an appreciating Yuan will not be offset by growing US trade balance deficits with other East Asian countries. Furthermore, giving up the actual currency peg will benefit rather than harm China, provided that the steps towards Yuan flexibility will be taken in the right sequence and order. We hold that a revaluation of the Yuan is necessary, inevitable and desirable just as much as it happened to be with the Deutschmark in 1969. It would not “damage Chinese development.” China needs a Yuan appreciation mainly in its own interest to assure domestic financial market stability, and to avoid an overheating of its economy and a soaring inflation.

Keywords: fixed exchange rate system, equilibrium exchange rate, economic policy

Suggested Citation

Sauer, Beate and Sell, Friedrich L. and Oberpriller, Christian, The Undervaluation of the Yuan Dispute: Is a Repetition of Germany's Experience in 1969 Necessary, Inevitable or Desirable? A Comment and Reply to John A. Tatom (2008). Global Economy Journal, Vol. 8, No. 2, Article 7, 2008, Available at SSRN: https://ssrn.com/abstract=2564530

Beate Sauer (Contact Author)

University of the German Federal Armed Forces - Universität der Bundeswehr München ( email )

Werner-Heisenberg-Weg 39
Neubiberg
Munich, 85579
Germany

HOME PAGE: http://www.unibw.de/makro/team/sauer

Friedrich L. Sell

University of the German Federal Armed Forces - Universität der Bundeswehr München ( email )

Werner-Heisenberg-Weg 39
Neubiberg
Munich, 85579
Germany

Christian Oberpriller

Independent ( email )

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