Report | Trade and Globalization

Revaluing China’s currency could boost US economic recovery

Briefing Paper #318

Download PDF

Press release

Full revaluation of the Chinese yuan would increase U.S. GDP and employment, reduce the federal budget deficit, and help workers in China and other Asian countries

For the past several years, the best economic research has shown that China needs to increase the value of its currency, the yuan, against the U.S. dollar by 25% to 30%. One year ago, China’s central bank said that it would “allow the country’s currency to float more freely against the dollar and other foreign currencies” (Richburg and Pomfret 2010). Since then, the yuan has inched up at a glacial pace, rising only 5.5% through June 14, 2011. Meanwhile, China has accelerated purchases of dollars and other currencies, adding $597 billion to its foreign exchange reserves in the past year, which reached $3.055 trillion in March 2011. While appearing to let the yuan float, China has actually increased its currency intervention by amassing record amounts of foreign exchange reserves to prevent meaningful appreciation of the yuan.If the yuan (also known as the Renminbi or RMB) and satellite currencies were revalued to their equilibrium levels, U.S. gross domestic product would increase as much as $285.7 billion (1.9%), creating up to 2.25 million U.S. jobs. Although it would take 18 to 24 months to achieve these full benefits, this growth would reduce the U.S. budget deficit by up to $71.4 billion per year.

Currency manipulation is also costly for China and other Asian countries that follow China’s lead. China, however, has resisted pressure to fully revalue its currency out of fear that it would reduce exports and hurt its domestic employment. This resistance means these Asian countries are suffering from rapidly rising inflation that is undermining real wages and fueling asset price bubbles; full revaluation by China and other currency manipulators, such as Hong Kong, Taiwan, Singapore, and Malaysia, would lower their domestic costs for food, oil, and other commodities, reducing inflationary pressures, and it would increase the purchasing power of their domestic workers. Revaluation is a “win-win” scenario for the global economy.

See related work on China trade | Trade and Globalization

See more work by Robert E. Scott