This is the title of an article in the latest Financial Times, which reflects the very hot topic of recent discussion about the revaluation of RMB and this is also supposed to be a major issue covered in our class.
You may click the link to read the original article: http://www.ft.com/cms/s/0/66dc0964-c7d9-11de-8ba8-00144feab49a.html
However, the discussion seems not to be simple at all, since from different perspectives, the conclusions on whether RMB should appreciate or not are utterly different. Obviously, from the website of our class, Professor Xie and his colleagues insist that RMB exchange rate should be kept within a reasonable interval and in the class, he said that the current level around 1:6.82 was good and should be held on for a while. Of course, he provided us with several convincing reasons.
Obviously, we can see many other counterpart opinions. Martin Feldstein, a professor of economics at Harvard University wrote an article named “Why the renminbi has to rise to address imbalance” in Financial Times on Oct. 30 (this is why I say this topic is so hot). He pointed out that “China’s policy of expanding domestic spending while depressing the renminbi will lead to its economy overheating, particularly its manufacturing sector. Allowing the renminbi to rise would shift demand in China from manufacturing to services and prevent inflation.” And his main focus was on the global imbalances caused by the undervalued RMB exchange rate: “A stronger renminbi would thus reduce China’s domestic imbalance and global imbalances.”
You may also refer to the original article: http://www.ft.com/cms/s/0/fd4b4852-c4db-11de-8d54-00144feab49a.html?nclick_check=1
Although at this stage of economic recovery, it is not very proper to talk about inflation caused by overheated capital inflows, we have to understand why many people are so eager to ask for a further appreciation of RMB. Just like what the Harvard professor said, the global imbalances are serious problems for the sustainable development of economies both in developed countries and emerging markets. In the first article I cited in today’s Financial Times, the IMF said that “rebalancing must involve a broad range of emerging economies if solid global growth is to be sustained over the medium term.” The author also said that although some rich countries in trade surplus-such as Germany and Japan-have raised their currency value against dollars, as their aging populations save for retirement, their efforts seem to contribute little to the global rebalancing.
However, I would say a currency policy should and must be considered as a domestic policy of one country first and I think it is because of the domestic concerns make Chinese government show a reluctant willingness of appreciating RMB. Mr. Lyons said in the first article that “there is a concern that if they (some East Asian countries) let the exchange rate rise, it will attract a lot of hot money but hit confidence”, which is already happening in Brazil. Therefore, the RMB exchange rate regime has become a worldwide issue not only relating to China’s own development but also to the rebalancing of the global economy. The government has to make a tradeoff between the two directions and let us see what will happen in the next stage.
written by Minxiao
It reminds me of the 1985 Plaza Accord. The agreement allowed US and other European countries to intervene Japan currency market, forcing yen to appreciate almost 20% against US dollars in three months after, hitting Japanese export sector hard, and reducing its economic growth from 4.4 percent in 1985 to 2.9 percent in 1986. China’s currency system is not market-determined and its banking system indeed lack of diversity. China has great growth of current asset and capital asset in balance of payments, and its policies are challenged due to its large foreign reserve. (Figures can be found here:
http://www.nationsencyclopedia.com/Asia-and-Oceania/China-BALANCE-OF-PAYMENTS.html)
However, healthy China economy can help other countries to recover, and the changes of its economic systems need patience and understanding from other countries.
What do you mean with “patience and support from other countries”???? China is soon to be the second largest economy in the world and should adhere to the same standards as the rest of the global community. Furthermore, by forcing the RMB to artifically low levels the Chinese government delays structural changes in the economy such as moving towards a more service centered marketplace. I do realize the benefit of a healthy China to help pull the rest of the world out of the recession. /Erik
In my view, the world should give China some time to adjust its policy and should not push China too hard in the RMB issue. Although as someone says that China is becoming the second largest economy in the world, it is not the case in fact. I mean, to some extent, economists has over-valued China. For instance, the high GDP growth rate and GDP does not mean China’s econony is muture and developed. After all, China’s market system has just runs for a decade and do not forget the billions of people in China. So every policy made, especially such as the appreciation of RMB will take a great effect in China as well as globe. And every impatient move may have an irrevocable bad impact in a wide range. Therefore, the Chinese government should take a bundle of things into consideration, such as stability of the country, export and so on. It is not a yes/no simple question. Just give China some time.
Jiayin
CHEN HUI
I think it is an issue to big to control…
Basically, due to the theoretical analysis on Purchasing Power Parity, Interest Rate Parity and the dramatically expanding foreign reserve of china, the appreciation of RMB is essential.
However, in reality, it has both positive and negative effects on china and world’s economy. Numerous people talked about them. Positively, it will accelerate industrial upgrading and technological innovation and adjust the economic structure. Negatively, as Dong fangming mentioned, it will hit the export and slow down our growth rate as Japan. Meanwhile, capital flows and inflation consideration is quite complicated.
In my personal opinion, for a long-run, the appreciation cannot be avoided. But in this sensitive period the appreciation of RMB is not realistic. Firstly, stability is the target of china and basic of china’s development. The consequence of appreciation is hard to expect, not only the essential hit on export and macro economy, but also the potential fluctuation or even crisis in financial market. Secondly, although recovery seems emerge, all the economy entities are sensitive. Since China has no direct responsibility for the crisis, it has no responsibility to save the “world”, especially the western world. Besides, china also suffers from the crisis. So it is not reasonable for china to worsen the current situation. Meanwhile, even if china choose to accelerate the appreciation of RMB, there also will be some other manufacturing entities to fill the gap which has no use to solve the trade deficit for USs. And the hurt of china will definitely infect the world through the close connections which have already formed.
Karthik from UncleMilton: I believe that we are all converging on the same conclusion. That the RMB has to, and will appreciate. But this appreciation has to be gradual over a period of time, and not rapid.
At the same time, I do believe it is fair for other countries to push China to revalue the RMB, otherwise there will simply be not enough action on the part of China.
I also disagree with the statement made by HKAC: “Although as someone says that China is becoming the second largest economy in the world, it is not the case in fact.”
China is the 2nd largest economy in terms of GDP(PPP). Even in nominal terms it will soon become number two. Every survey indicates this and there are no doubts about this. See link below.(excluding EU since its not a country)
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29
I generally agree with you. A gradual appreciation is both good to China and the rest of the world. A rapid appreciation may do good to the balance of international trade in the short run. But it will then triger a great recession of China’s economy and thereby a new round of recession in the whole world, especially under consideration of that we are now in the unstable stay period of the criss, as you and many of us have known the significant role of China in the world economy.
Secondly, I agree with you by using GDP adjusting by PPP, which can be a better interpretation of gross product level of a country.
Yilin
The appreciation of Renminbi will definitely not save the “world”, for the apprecation of Renminbi will make China face worse situation. For on one side, China is an export-oriented country, appreciation of Renminbi will weaken the competition of export products in the global market which is already mentioned by you, and on the other side, the appreciation of Renminbi will cut the foreign captial to invest in building factories in China because of the increased cost. Both sides will have bad influence on China’s development, thus even China “sacrifices” itself, it still can not save the “world”.
Yilin
Renminbi will appreciate in the future but it will not appreciate for the purpose of rebalancing the economy in the world but the gradually development of China.
In the short run, the appreciation of Renminbi may stimulate the economy globally, but we need to consider the main reason of the recession, in the long run, the conficence is of the most importance.
In my opinion, others should not give great pressure on China on the appreciation issue, but should focus on its own measures to regain confidence.
I agree that the appreciation has to be gradual, and there are lot of consequences to consider, as Wu Dike mention, in this unstable period of the economy.
I think the effect on exports will be high if it happens at the same time with an appreciation of East Asian currencies because it will have an impact on the cost of China´s processed exports.
Response to Yilin:
I would say that other countries are right to pressurize China to appreciated RMB. Left to itself, China would keep the RMB undervalued for a much longer time. China does not operate in isolation and is becoming an increasingly important part of world community. In every situation,it cannot do what it wants. Other countries too have important tools to retaliate. This is a delicate diplomatic process with give and take from all sides. So I see nothing wrong in other countries telling China to appreciate its currency.
Why China has to carry the cross? It took her 30 years to be where she is now, would it be too much of a burden to her?
With the various double standards practices imposed by western countries towards China, why suddenly all eyes are on her now to “save” the world? Furthermore, if China is generously enough to let RMB to appreciate, will this method able to align the world trade imbalances, especially to US’s current account deficit? Or, it’s just an economic models based on certain untested assumption? Will unsuccessful revaluation of RMB brings detriment to China instead?
Check out the comments by World Bank Chief Economist Justin Yifu Lin:
http://news.alibaba.com/article/detail/trade/100197730-1-world-bank-economist%253A-leave-china.html