EXPORT DEPENDENCY: A worker completes a quality inspection on a product to be exported by Xiamen Lota International Co. Ltd. (ZHANG GUOJUN)

While imposing a range of anti-dumping and countervailing investigations on Chinese exports, the United States and European countries are also calling for the appreciation of the renminbi. Guo Tianyong, Director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics, offered his insights in The Economic Observer. Edited excerpts follow:

The decision to appreciate the renminbi or take alternative measures has always been a difficult choice for China to make. If China increases the renminbi exchange rate when the basis for economic recovery is still uncertain, it will surely exert a negative impact on exports, which have just begun to show signs of improvement, thus hindering the overall economic resurgence. But if China turns a deaf ear to the international request, Western countries' protectionism could be considered justified.

In my view, when it comes to the renminbi exchange rate we should neither take a negative stance by wholly shunning the request, nor completely appease the demanders by appreciating the renminbi.

What we need to focus on is stabilizing the current exchange rate while improving the international environment for exports.

Mounting pressure

Ever since the global financial crisis broke out, consumption in the United States has contracted. American consumer demands will most probably continue to diminish resulting from sluggish income growth in addition to plummeting asset prices.

What needs special attention are the changes in American consumers' behavior. In August 2009, America's personal savings ratio increased to 3 percent from 0.4 percent in 2007. In May this year, it stood at a record-high 6.9 percent. If America's consuming mode is susceptible to such rapid and erratic change, we could witness a deeper and longer recession in exports in the future. What's more, the American economy represented by the auto industry will worsen with the overwhelming credit crunch and lower credit level prevailing throughout the whole industry.

The United States, then, has two choices to promote its economy—finding new growth points like investment in the new energy industry, or weakening the dollar.

Although new energy could work as a propellant for economic progress, this will not be achieved in the short term. The resources and commitment necessary for research and development, not to mention the promotion and application of new energy, cannot be expected to solve the urgent problems that confront the United States.

By contrast, the strategy of weakening the dollar would produce immediate results in that America could wipe out its debt and improve the competitiveness of its exported goods in the international market, thus enhancing its manufacturing industry while stimulating job creation. In this sense, weakening the dollar bears a great deal of significance both in terms of politics and the economy.

Due to the comparatively stable renminbi exchange rate against the U.S. dollar, the continuous depreciation of the dollar against the euro has also caused the yuan to depreciate against the euro.

China's soaring export sector has made European countries and America even more anxious. They pressed China to appreciate the renminbi so that their own exports could gain competitiveness in the international market, which has turned out to be the last bastion of hope to keep their economies afloat.

But from my point of view, the appreciation of the yuan will do no good to China or the rest of the world. As a matter of fact, the appreciation of the Chinese currency will not change the trade relationship between China and other Western countries at all.

For one thing, it is still too early to tell whether the Chinese economy has recovered or is currently recovering. For another, if the Western developed countries totally ignore what China has contributed to the world economic recovery, forcing it to increase the renminbi exchange rate and allowing China's economy to be hit hard by appreciation, Western companies that have business relations with China or have Chinese branches will ultimately suffer as well. As the world's third largest economy, China's influence should not be taken for granted.

Therefore, the appreciation of the yuan will harm both China and Western countries.

Active response

China should resolve the problem by fundamentally strengthening itself in the economic and political arenas.

First, domestic demand should rise as the biggest engine promoting Chinese economic growth. From November, 2008 to September 2009, China witnessed a decrease in exports for 11 consecutive months. September, however, experienced an export decrease of only 21 percent month on month, a slight recovery compared with that of August. As the numbers indicate, a full export recovery will still need time to develop. Another question of concern is how much exports will pick up even after the world economy warms up as a whole.

Without doubt, China should focus on encouraging domestic demand, rather than relying on exports since overseas demand seems doomed to remain relatively low. In the short run, investment—especially government investment—will account for the overwhelming majority of domestic demand, so we should focus more on private investment in the post-crisis era. In the long run, expanding consumption should be prioritized to ensure economic growth. To achieve this goal, we should reform our distribution and social security system to increase resident's income and spur consumption.

Second, export rebates need to be adjusted. Since August 2008, China has increased its export rebate rates seven times. Since it was the plunge in overseas demand that bore down on the export sector, whether a change in export rebates would work or not remains a question. In my view, this round of export rebate adjustment should target industrial restructuring by imposing different rebate ratios on the different sectors.

Third, we should perfect legal regulations and enhance policymaking. According to data from the World Trade Organization, China was ranked as the biggest target of anti-dumping claims for 14 consecutive years. In recent years, China has resorted to solving trade disputes solely through diplomatic negotiations rather than legal procedures. The result has been far from satisfying. As a result, we should alleviate trade frictions through participating in drafting international trade laws while enhancing efforts to make domestic companies aware of trade-related rules and regulations.

Fourth, we should push for the globalization of the renminbi. The ever-increasing foreign exchange reserve has made it difficult for China to conduct macro adjustments and control trade frictions. Promoting the global use of the renminbi will alleviate exchange rate risks and promote trade development. To make this possibility a reality, China should perfect its financial system, improve its monetary administration, and build up effective risk-prevention mechanisms.