Tendency of RMB Exchange Rate

1

• Tendency of RMB Exchange Rate

Wang Guogang Institute of Finance
Banking Chinese Academy of Social Sciences
April 2nd,2004
2
Content

• I.Why RMB exchange rate issue
• II.Chinese economic status related to RMB
  exchange rate
• III.Comments on RMB exchange rate issue

3
I.Why RMB exchange rate issue

• 1.In 2002 ,the prevail argument of export of
  deflation from China spread.
• 2?In 2003,increasing pressure to revaluate RMB
• ? In Feb,2003,the minister of MOF of Japan
  raised
• the RMB exchange rate issue in Tokyo.
• ? In middle 2003,US and some other developed
  countries
• joined in pressuring RMB revaluation
• 3?The reasons to pressure the revaluation of RMB
  
• ? increase of BOP surplus,especially against the
  U.S.
• trade surplus against U.S. reached as high as
  100 billions

4
I.Why RMB exchange rate issue

• ? The cheaper prices of Chinese commodities,the
  real
• purchasing power is much stronger than US
  dollar.
• ? The rapid growth of Chinese foreign currency
  reserve
• affects the independence of Chinese monetary
  policy.
• 4?Arguments from different sides
• ? Louder voices from some governments and
  interest groups
• ? Louder voices from some speculators and
  investment banks.
• ? World Bank IMF,Greenspan stressed on the
  importance to
• maintain the stability of RMB exchange rate
  during the
• transition to a more flexible RMB exchange
  rate determination
• mechanism.

5
II.Chinese economic status related to RMB
exchange rate

• 1. Import and export in China from 1978 to 2003

6
(No Transcript)
7
(No Transcript)
8
2. Chinese economic status related to RMB
exchange rate
9
(No Transcript)
10
(No Transcript)
11
3.The supply of currency
12
(No Transcript)
13
4.Foreign reserve
14
5.The tendency of RMB exchange rates vs. US
dollar
15
Exchange in inter-bank foreign exchange
market1997-2003
16
III.Comments on RMB exchange rate issue

• 1?Exchange rate issue is sovereignty of any
  economy
• The determination mechanism of exchange rate
  is actually different from
• any exchange rate theories,which at least
  neglecting three pre-conditions
• ?Sovereignty cannot be neglected in any
  markets,which reflected as tariff?non-tariff
  quota?anti-dumping?trading conflicts
  therefore,pure free trade does not exist on the
  earth.
• ?the exchange rate should reflect the Immense
  diversity in economic growth?employment?foreign
  trade, and other political/economic conditions
• ?The net export is not the only factor to decide
  the exchange rate, economic development,political
  system, social and cultural factors would also do
  so.

17

• Exchange rate is not an issue decided entirely
  by the international market
• ? Each economy would choose its own exchange rate
  determination mechanism and exchange rate based
  on consideration of stability.
• ? Each economy would intervene the foreign
  exchange rate market whenever the exchange rate
  floats wildly.
• ? And also when one economy takes disadvantage of
  the exchange rate,some economy would pressure
  other economy to adjust the exchange rate by
  using political,diplomatic, economic measures and
  mass media.

18
2. Government force should not be used to
revaluate RMB exchange rate

• ?China is still a market-oriented economy
• After 1980s, the RMB exchange rate was
  mainly determined by the central government.
• Since the reform of foreign currency
  management system in 1994, RMB exchange rate is
  determined by the market mechanism to some
  extents.
• Unexpectedly,there are some proposals to
  reevaluate the exchange rate of RMB through using
  government force. They even give us detailed band
  of exchange rate fluctuations, which makes us
  confused that how should we promote the marketing
  mechanism in the exchange rate determination
  reform if we utilize the government force to
  raise it ?

19

• ?It is unacceptable to simply adjust the exchange
  rate of RMB by using government force instead of
  market mechanism.
• ? It is inconsistent with the goal and process of
  the RMB exchange rate system reform based on
  market force.
• ? It is inconsistent with the goal of
  independence of monetary policy
• ? With the rapid growing of foreign currency in
  the coming stage,it is rather important to make
  the foreign supply/demand equilibrium
• to promote the liberalization of foreign
  currency control.
• ? The exchange rate should be determined by
  demand, supply and central bank intervention
  jointly

20
3.How to rate the actual purchasing power

• Different Prices of Hamburger2001-2003

21

• ?Average GDP per person in China just reached
  1000 US Dollar in 2003,while it is almost 30,000
  in the US.
• ? Even if 95 families in the big and medium
  sized cities use all their monthly income to buy
  hamburgers(10 Yuan/one),they can just get 200 or
  so.
• While Americans who are blue collars can
  afford more than 1000 hamburgers(2.71US
  dollar/one).
• ?But the prices of some commodities such as
  cars,residential houses,digital photos and
  computers are much more expensive than those in
  US,Japan and Europe.
• ?The above argument just reflects the unavailable
  explanations of so-called practical purchase
  power.

22

• Average foreign reserve per person UnitUS
  dollar

23
4?The pressure to raise RMB is weakening

• ?Several measures
• ---To adopt some measures to solve trading
  conflicts
• ---To accelerate the liberalization of capital
  control
• ---To reduce the return-export-tax
• ---To enrich the portfolio of foreign reserve.
• ?Several domestic changes of economic
  development
• ---The rise of CPI
• ---The change of international income/outcome
• ---The possible slow-down growth of economy.
• ?The recovery of world economy

24

• 
  
• Thank You !