The emergence of the Chinese economy as another large open economy in the past ten years has been a major event globally, and particularly so to the Asian neighboring economies such as Korea. Its ramifications are presumed to be positive overall but accompanying adjustment processes are not necessarily smooth. We observed an upsurge in global interest in the exchange value of the Chinese renminbi in 2003, and it was started by governmental and private observers in the U.S. who raised charges China had gained disproportionate export competitiveness by artificially keeping its exchange value of the currency low.

This paper deals with issues related to the exchange value of the renminbi of the Chinese economy. We first offer a systematic examination of the political as well as economic developments that had led to the current situation. Then an overview of the Chinese exchange rate system as well as estimations of how much the Chinese yuan is under-valued using a simple models of the purchasing power parity and interest rate parity are presented. In addition, we examine the impact of an expected re-valuation of the yuan on Korea's exports, which is somewhat beneficial as it would help Korea's export price competitiveness. However, finally, we conclude that the most important effect of the expected yuan revaluation will be increased pressure on the exchange value of the Korean won, hence Korean government as well as businesses need to prepare for that eventuality.