Should China Lower Its Exchange Rate

Should China Lower Its Foreign Exchange Rate?
    If you ask what the hottest topic in the current financial market is, it is definitely the “rate war” between China and the United States.   This term can be understood as a game with respect to the RMB (China currency) exchange rate’s appreciation. The United States believes Chinese currencies are probably undervalued against dollars, so Chinese currencies ought to gradually appreciate.   According to a journalist Liu Qianyu, the US Treasury Secretary Tim Geithner announced on the congressional hearing in September to take measures to push the RMB to appreciate (par.1).   However, Chinese Premier Wen Jiabao called on the world to objectively and fairly treat the RMB exchange rate issue while visiting Europe in October, 2010 (Yan, Par.1). The exchange rate issue is not simple about money conversion; rather it concerns the financial system, the economic growth and the trade balance. Particularly, the exchanges rate of a country with influential economic power plays a significant role in the international financial market, and the country’s exchange rate fluctuation even influences the other economic entities.   Therefore, China as the largest developing country should not appreciate its exchange rate based on three reasons: boosting export trade and maintaining social stabilization, avoiding speculative activities and contributing to the world economy.
    The first step in knowing why China should not appreciate its foreign exchange rate is to understand the exchange rate’s definition and its effects on international trade. An exchange rate can be defined as the rate “at which one currency is converted into another” (Hill, Global, 65).   When a foreigner is shopping in another country, he or she will consider an exchange rate factor.   He or she will convert foreign prices into domestic prices using the exchange rate method and get them compared, which happens commonly.   It is true that some Canadians, while they...