A Proposed Strategy to Correct the Chinese Exchange Rate

by C. Fred Bergsten, Peterson Institute for International Economics

September 16, 2010

China's currency remains substantially undervalued, importantly due to that country's massive intervention in the foreign exchange markets, and is a major cause of its large and growing trade surplus. Its "new exchange rate policy" announced in June 2010 has resulted in less than a 1 percent rise in the renminbi. During 2005–08 China let its exchange rate rise by 20 to 25 percent; the US goal should be to persuade it to permit a similar increase over the next two to three years. This appreciation would reduce China's global current account surplus by $350 billion to $500 billion and the US global current account deficit by $50 billion to $120 billion. Elimination of the Chinese misalignment would create about half a million US jobs, mainly in manufacturing and with above-average wages, over the next couple of years.

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