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BEIJING – The United States is reportedly pushing China to agree to keep the value of the renminbi stable, as part of a deal to end the trade war between the world’s two largest economies. It is a demand that China must think twice about before accepting.
The renminbi was undoubtedly undervalued for many years, including through a peg to the US dollar that was established in 1998. A undervalued renminbi was an important contributing factor to the trade surplus that China has run consistently since 1993, when its per capita income stood at just $400. In other words, even when China was a very poor country, it was exporting capital to the rest of the world, especially the US.
Though running a trade surplus benefits some sectors of the economy for some period of time, it is unclear that it benefits the economy as a whole in the long run. Still, two decades of maintaining a current-account surplus (which includes trade), together with a capital-account surplus (fueled by large inflows of foreign direct investment), enabled China to accumulate huge foreign-exchange reserves and a large stock of FDI. As a result, though China is one of the world’s largest creditors, it has run an investment-income deficit for more than a decade.
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