ISAS Insights

China faces significant political pressure from industrialised economies to revalue its currency upward. Internally, China’s currency ad justment depends largely on the dynamics of its labour and financial markets. Millions of underutilised Chinese labourers, who are in the process of migration from the countryside to urban areas, give Beijing the upper hand in allowing a gradual revaluation of its currency. However, the growing cost of monetary sterilisation is the key hurdle in keeping its currency undervalued for long. Nevertheless, exchange rates are not always determined by economic forces alone – the breakdown of the Bretton Woods exchange rate system in 1971 and the signing of the Plaza Accord in 1985 are two examples. The available data shows that South Asia is generally not hurt, if not a gainer, by an undervalued Chinese currency.