There has been a lot of talk in the news regarding the renminbi (also known as the yuan), the official currency of the People's Republic of China. American politicians have accused China of manipulating their currency; business leaders have lamented that its low value hurts their exports; and even economists agree with the above assessments. In today's blog we will cut through the rhetoric to see this debacle through a different lens; the lens of a perspective traveler.
The Chinese currency is currently under a floating managed exchange rate system and is pegged to a basket of currencies. What is causing all the commotion in the world's currency markets is that on June 19, 2010 China announced that it would allow greater flexibility in the value of the currency. Then, on June 21, the renminbi rose to a two year high which indicated that policy makers have heard the message. The underlying reason behind this decision is simple: Politics.
This weekend Toronto will hold the G-20 summit where finance ministers and central bank governors from the biggest economies of the world will gather to discuss the world economy. China, sensing that the major world economies will once again bash its currency, decided to preemptively take initiative to show that they understand the concerns of other countries.
The important thing to know about the Chinese exchange rate -- at least for travelers -- is that it is still kept artificially low. This means that everything you buy -- from food to hotels to clothing -- will be much cheaper than comparable products back home. Scholarly studies by both the World Bank and the International Monetary Fund indicate that on the basis of purchasing power parity, the renminbi should be trading between RMB1.9 to RMB3.7 as opposed to the current exchange rate of RMB6.8123.
The recent appreciation of the renmibi is largely symbolic. If you were thinking about going to China, don't worry, things in China are still cheap.
