China’s strengthening currency forecasts a gowing consumer economy

Many US politicians continue to spout off rhetoric that America can’t compete with China in exports because the Chinese are artifically devaluing their currency. This assertion however is quickly becoming an invalid one as the renminbi continues to appreciate in value. Business Insider reports on this surprising trend and what the IMF believes will occur as a result of a stronger Chinese currency:

A new report from the IMF says the renminbi is only “moderately undervalued” and points to a decline in its current account surplus and an appreciation in its real effective exchange rate.

What’s more, the People’s Bank of China’s decision to widened the renminbi’s trading band against the U.S. dollar to 1 percent back in April has allowed market forces to have a bigger influence on the exchange rate. This wider band allows daily fluctuations that are up to twice what was previously allowed and allows for more independent monetary policy.

“A stronger renminbi would increase household purchasing power, help expand the service and other nontradable sectors, boost the labor share of income, and facilitate financial sector reform.”

This chart shows that the renminbi has appreciated 30 percent against the U.S. dollar since 2005. 25 percent in nominal terms:

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