Correcting the Chinese Exchange Rate

by C. Fred Bergsten, Peterson Institute for International Economics

September 15, 2010

The US and Chinese global trade imbalances are increasing sharply. This makes it considerably harder to reduce unemployment and achieve a sustainable recovery in the United States. China's currency remains substantially undervalued, importantly due to that country's massive intervention in the foreign exchange markets, and is a major cause of its large and growing trade surplus. It has risen by less than 1 percent since the announcement of a "new policy" in June 2010. China let its exchange rate rise by 20 to 25 percent during 2005–08. Our goal should be to persuade it to permit a similar increase over the next two to three years. This would reduce China's global current account surplus by $350 billion to $500 billion and the US global current account deficit by $50 billion to $120 billion.

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