Keep RMB stable - for now By Wang Yuanhong (China Daily) Updated: 2004-09-03 13:34
A sensible currency policy is one of the most important ways a country
controls its economy.
Economic development and international balance should both play a part in
determining exchange rates.
A stable exchange rate for the renminbi provides a stable support for the
economy to maintain its annual 7 to 8 per cent growth. It is also one of the
main factors that propel growth in China's international trade, foreign
investment and foreign exchange reserves.
In fact, the changes in the renminbi exchange rate could be said to reflect
the changes in the Chinese economy.
By 1994, the renminbi was devalued against the US dollar by half its 1986
rate. But as the Chinese economy began to boom, it rose again. Between 1994 and
2002, the renminbi appreciated by 18.5 per cent against the US dollar.
Figures from the International Monetary Fund show that the renminbi
appreciated by 21.5 per cent against the currencies of China's major trade
partners between January 1994 and September 2002.
China's sustained, sound economic growth is matched by China's financial
conditions and the supervision mechanism that is in place here.
As well as the surplus in international balance and increasing foreign
exchange reserves, there are several other factors pressurizing the renminbi.
China's dual surplus in the current account and capital and financial
accounts is a direct result of the nation's foreign exchange policy. This is
also why the foreign exchange reserves have grown rapidly. The policy aims to
keep foreign exchange within the country, and demand from banks, companies and
individuals is thus suppressed. Meanwhile, individuals and businesses seeing
weakening impulses make investments with foreign currencies.
The turbulence in the financial markets in Western countries is fast
spreading globally. Expected returns on investments are shrinking. It means
investors are now keener to sell their foreign cash to the banks rather than
invest it.
The fairly high but stable interest rate of the renminbi also adds to the
pressure of renminbi appreciation, and the difference in interest rates between
renminbi and other currencies attracts overseas money into China.
But in the face of this mounting pressure on the renminbi, at least one point
needs to be clarified: China's exchange rate policy is not the cause of global
deflation and revaluing the renminbi will not ease deflation.
Despite its vigorous growth, China's GDP is only 3.5 per cent of the world's.
China's trade takes up a mere 5 per cent of total global trade volume.
Multinational companies choose China because they are eyeing its huge market
and its economic progress rather than the under-valued currency here.
Their choice is also why there is a rising trade deficit between the United
States and China. The US used to import Asian products from Japan, the Republic
of Korea and China's Taiwan Province. As the international industry giants move
their manufacturing bases from these countries and regions to China, China sees
more trade surplus to the US and with it, more trade deficit to these economies.
China's robust growth has played a key role in lifting the economy, both of
the world and of East Asian countries, out of the financial crisis of the late
1990s. This growth could be delayed by an appreciation of the renminbi and East
Asia could suffer economic turmoil.
In fact, a revaluation of the renminbi would not have a particularly good
influence on the economic recoveries of the US, Japan or Europe, a stance
Goldman Sachs supports.
In other words, if the renminbi were raised under the wrong conditions, it
would not benefit any other country - while China would have to suffer huge
shocks in different sectors within the country.
Positive effects include the fact that consumer goods and production
materials produced in other countries would get much cheaper when measured
against the renminbi.
Renminbi appreciation will also attract more foreign investment, reduce the
costs of international loans and encourage manufacturing facilities to move into
inland areas where labour costs are much lower.
But revaluing renminbi hastily or dramatically would have negative effects on
the Chinese economy, which must not be overlooked.
First, the manufacturing sector could see remarkable damage. China's
competitive advantage in the manufacturing sector is in its low labour costs.
Exports would suffer from a rapid rise, and in the agricultural industry,
cheaper imports would take an upper hand over domestic crops, with relatively
reduced prices.
The direct aftermath would be a large-scale migration of farmers, especially
those in eastern areas, into the cities and towns.
The service sector might also be influenced. Once the currency is raised in
value, the financial market will become attractive to short-term cash. Given the
country's current ability to control financial risks, swathes of hot cash would
probably trigger a financial and economic crisis here.
Residents could find their money has a better purchasing power after
appreciation. But when the negative influence on exports, international balance
and economic growth fully emerge, employment prospects and incomes of residents
will be damaged, ruining quality of life and standards of living.
Employment would be put under far more pressure once the currency is
revalued. The major providers of new jobs are export-orientated and
foreign-invested companies. With exports suppressed after the appreciation,
employment opportunities would be reduced, adding extra pressure to the already
sombre employment situation here.
Being still at an early stage of industrialization, China is far from being
the world's workshop. Its competitive advantage lies in its low labour costs,
not products and businesses of core competency.
The economy has to be developed further, more jobs must be created and the
pressure of deflation has to be eased.
In all, considering China's entire current situation, the time is far from
right to revalue the renminbi.
There are advantages and disadvantages, but the former are outweighed by the
latter.
Since academics have not reached a consensus about the factors and their
roles in deciding the exchange rate, we should stick to two main criteria when
judging a currency's exchange rate: Whether the economy is advancing smoothly
under the current exchange rate level, and whether economic progress is
sustainable under the exchange rate arrangement.
If the answers are both positive, the exchange rate arrangement should not be
dramatically changed.
