Let’s continue the topic of the exchange rate of RMB. Soon after the class of last Thursday, I checked some major Chinese news website and other media about the message of the central bank’s hinting to appreciate RMB. Like what FT guessed, some of the news also pointed out the central bank of China was signaling a further appreciation of Renminbi, although the opposite opinions took the majority.
It is interesting that on Wednesday and Thursday, around the time when FT first proposed this issue, the Shanghai A Share shifted from uprising to downturn after more than a week’s climbing, somehow reflecting people’s concern that a stronger RMB might hurt Chinese economic recovery. However, the stock started to rise again on Friday and the performance of the market seemed to break the rumor instantly.
These days I am waiting for the latest news or announcement of the APEC leaders’ conference to grasp some signal of the RMB appreciation issue but the formal declaration was postponed because of some slight disagreement between China and America on the official terms. Despite of this, I could see that the appreciation of RMB is not a main measure that Chinese government would like to take in the following months. China’s President Hu Jintao spoke during the APEC CEO Summit that to expand the domestic consumption was still the first task to combat the shrinking of international trade, without mentioning alternatively to appreciate RMB, in Singapore Nov. 13.
A detailed report of this could be found at: http://www.chinadaily.com.cn/china/2009-11/13/content_8969771.htm
Hu also mentioned other ways to balance the surplus of Chinese trade reserves, including increasing the import of “advanced technologies and equipment, key spare parts as well as important energy resources and raw materials”. He also added other policies such as tax-cut, reform of the medical care and the housing market to expand the individuals’ consumption. Obviously China is making effort to change the current imbalance of its international trade, but not relying on a stronger RMB.
From the US side, President Obama was surrounded by concerns of protectionism towards other emerging markets, like Mexico and Russia, as well as China so that he did not have many opportunities to raise the topic of appreciation of RMB. Only during a conference held on the sidelines of APEC’s weeklong annual forum, Ron Kirk, the US Trade Representative hinted indirectly that China should make more efforts to reduce its trade surplus by appreciating Renminbi. Therefore, the pressure from the outside on revaluating RMB is not as heavy as I have expected. But President Obama may still reiterate this issue during his first visit to China from today.
See the news below to get more information on the standpoint of the US: http://www.chinadaily.com.cn/world/2009-11/14/content_8972538.htm
Until now, although few evident seems to support the guess of FT that the People’s Bank of China hinted a appreciation of RMB, nobody could forecast what would happen in the next six months or even closer. Because the reality may urge the exchange rate of RMB to rise since the bubble in the Chinese financial market starts to gather, as what was concerned about by the central bank of China. The risk of a new round inflation also begins to emerge from the data on the increase of asset prices and the speedup of money supply uncovered by the central bank recently. Hence, although it is still difficult to say when the RMB is about to appreciate, we may carefully expect a clearer picture of the trend at the end of this year.
By Minxiao
There is little sign of either China or most east Asian countries (except Japan) allowing their currencies to appreciate substantially. And the recent experience of other emerging markets is likely to make them yet more reluctant.Rebalancing the global economy was never going to be done by Christmas, and nor is it a simple question of domestic demand shifting from the US to China.Yet the effect of the Chinese exchange rate is felt across the developing world, since many other developing countries are terrified of competition from low-cost Chinese exports. A rise against the dollar is a rise against the renminbi.It seems unlikely that global exchange rates are going to play their part in undoing the imbalances that continue to threaten economic
By Jiayin
Karthik from Unclemilton:
Good insight Jiayin. You are right in saying that re-balancing the global economy cannot be expected in the short term. And other Asian countries that are dependent on exports are afraid of seeing their currency rise.
But I would disagree when you say that “It seems unlikely that global exchange rates are going to play their part in undoing the imbalances that continue to threaten economic stability”. Global exchange rates will of course play an important role in re-balancing things. Of course, only the exchange rates can’t improve the imbalance. There are numerous other things that need to be done. Eg: China should increase domestic consumption, China should spend more on Social security and health-care, USA should start saving more, Countries should gradually move awa from the Dollar as the reserve currency etc. etc.
When I have said “it seems unlikely that global exchange rates are going to play their part in undoing the imbalances that continue to threaten economic “, it depends on whether some complex problems have solved. For instance, rising commodity prices have pushed up the value of exports and the exchange rate and attracted money into the equity market. There is a concern that if they let the exchange rate rise, it will attract a lot of hot money but hit confidence. It is an easy yes/no question.
Jiayin
With my experience working in the IMF, I could say that the revision of the sentence referring to RMB is a deliberate change, at least from the point of view of the PBoC.
Let’s look back into the recent history first. Renminbi was actually appreciating through 2007 to first half of 2008, the exchange rate rising from 8 USD to 6.83 USD under the floating-in-interval method. What made the trend stop was the crisis, and then we have seen no change in exchange rate of RMB to USD from late 2008 to now, with the rate almost around 6.83. There was two reasons for this stop: 1. the objective shirking external demand for Chinese goods decreased the amount of inflowing USD. 2. the central bank itself stop to maintain the floating-in-interval in order to protect China’s export.
So, as these things have not been changed substantially nowadays, the central bank will not do a drastic surgery on the RMB exchange rate. Please not that China’ export amount in 01/2009-06/2009 was 9461.2 hundred million RMB, which gained a -21.8 decrease compared with that of Jan-Jun of 2008. And the relative decrease in Sep 2009 is still -21.3. Besides, the monthly CPI ratio from Jan 2009 to Sep 2009 compared with those of the same period of last year(2008) are: 101, 98.4,98.8,98.5,98.1,98.3,98.2,98.8,99.2.
In my opinion, the central bank has no need and also no necessity at all to deal with the problem of appreciation of RMB at a visible short term.
I agree with Dike’s view that the central bank has no need to get down to the issue of RMB appreciation. As for China, only when the inflation needs effectively and quickly restraining can RMB appreciation has its sound and sufficient reason. Because once RMB is appreciated, it will: 1.do direct harm to Chinese export-oriented manufacturers; 2.compromise the competitive power of Chinese companies; 3.depreciate our foreign reserves; 4.attract hot money overseas to flow in and foster speculative activities; 5.pave the way for the next round inflation crisis. On the contrary, RMB appreciation can bring about manifold benefits to USA: 1. relieve debt burden overseas; 2.strengthen protectionism and help recover the real economy; 3. plunder fortunes from overseas by launching financial war. From the striking comparison we can see that who will be the final winner of the war of RMB appreciation. In a word, by urging China to appreciate RMB, the US can gain easily what Chinese people have worked hard to accumulate.
(written by Zhang Jundong)
I do agree that this is a very delicate dialogue with two opposing views. However, as was stated by Dominic Struss-Kahn and many other policymakers in today’s WSJ (refer to unclemilton’s blog), an artifically low yuan might postpone structural changes in the chinese economy needed to further societal development. By relying on exports for too long might hold back intellectual development forcing too much dependence on the manufacturing sector. Just wanted to provide another view of the issue. Comments? /Erik