The Renminbi Challenge: Is a Revaluation of the Chinese Currency a Wise Step Forward?

The aim of this paper is to investigate if a revaluation of the Chinese renminbi is in China’s interest and whether or not a renminbi revaluation can contribute to correct the US current account deficit. For that purpose, advantages and disadvantages of a revaluation for China are discussed. Furthermore, the fundamental causes of the US current account deficit are analysed to evaluate to what extent a renminbi revaluation can correct this imbalance. The discussion is based on previous research in this area. The main result is that a revaluation of the Chinese renminbi is primarily beneficial for China. Additionally it is found that the fundamental causes of the US current account deficit are domestic macroeconomic conditions and not China’s exchange rate policy. Nevertheless, a renminbi revaluation can help to support to correct the imbalance situation. As evidence is found that a revaluation is beneficial for China, it is further analysed how the revaluation should be practically obtained. The basic result is that the renminbi revaluation should be initiated by more exchange rate flexibility rather than by a one-step appreciation