Stronger Yuan Arouses Concern
Unilateral appreciation of the renminbi goes against China's sound economic growth
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UPDATED: February 10, 2014 NO. 7 FEBRUARY 13, 2014
Stronger Yuan Arouses Concern
Unilateral appreciation of the renminbi goes against China's sound economic growth
By Lan Xinzhen

Adverse impact

All of the above begs the question of whether or not China will benefit from the yuan's continual appreciation in the international market. Li said he is a "victim" of the renminbi's appreciation, therefore he doesn't wish for the renminbi to increase its value.

Wang Yong, a macroeconomic researcher with CITIC Securities Co. Ltd., also thinks the competitiveness of Chinese export-oriented companies will be attenuated and that China's position as the workshop of the world will be weakened by the renminbi's appreciation. To address the increasing costs, many manufacturing companies have begun to move their factories from the coastal areas of south China to the inland areas or even other countries such as Cambodia, Bangladesh and Viet Nam.

Global Sources Ltd. conducted a survey last December with over 500 Chinese companies. The result shows that renminbi appreciation is the most pressing challenge they face in 2014. In comparison, in the 2012 survey, the exchange rate problem ranked only fourth on the list, coming after rising costs, price wars and the decline in orders from Europe and the United States.

Continual appreciation of the renminbi also imposed heavy pressure on domestic consumer consumption. Fuelled by expectations of renminbi appreciation, the international hot money market has engaged in a veritable frenzy of yuan speculation. This money has entered China through its capital market, resulting in increased inflation. In recent years, the Chinese Government has formulated measures to control prices, which have to date had taken some effect. However, since the renminbi is still in the process of appreciation in the international market, there is still space for hot money to speculate in renminbi. Particularly after the Chinese economy has recovered, the new round of price hikes will further knock down the domestic purchasing power of the yuan.

Wang said China should watch out for the unilateral appreciation of the renminbi. A cautionary example is Japan after the Plaza Accord in 1985. The accord made the Japanese yen's exchange rate against the U.S. dollar rise remarkably, and the Japanese economy then promptly entered into recession for more than two decades. The United States has long claimed that the renminbi is artificially undervalued, but this remains a very aberrant opinion.

Ye Shumei, a manager of Beijing Youth Travel Service Co. Ltd., welcomes the yuan's appreciation. "The number of outbound travelers hit record highs again in 2013, and many Chinese go abroad for shopping. This is because of the appreciation of the renminbi," Ye said.

She thinks if the renminbi continues appreciation against the U.S. dollar in 2014, she will yield even better results.

Wang thinks the biggest benefit of the yuan's appreciation is that it contributes to the currency's internationalization. In the last decade, China has been making the renminbi a more international currency. Owing to its continual appreciation, the yuan has become more attractive in the international market, particularly while the U.S. dollar continues to depreciate. To date, China's central bank has signed bilateral currency swap contracts with 22 countries and regions with a total value of nearly 3 trillion yuan ($491.8 billion).

Flexibility needed

Starting this year, China will comprehensively deepen reforms. Various reforming measures, including exchange rate reform, will also be further accelerated. How to guarantee national interests and avoid damaging people's interests during the reform process is a big challenge for decision makers.

Zhang said that unilateral appreciation of the renminbi indicates that China is still unfamiliar with the operations of the international monetary market and has no targeted measures. When China's trade surplus shrinks and its economic growth slows down, massive inflow of hot money has become the most powerful force pushing up the renminbi exchange rate. This also means the appreciation of the renminbi carries hidden risks.

Unilateral appreciation has not occurred because the yuan's influence in the international market has increased. In the past year, the renminbi appreciated with the price of damaging China's national interests as well as those of export-oriented companies and Chinese people in general. Export-oriented companies have enough grounds to demand that decision makers adopt powerful measures ensuring a stable exchange rate for the renminbi.

Zhang thinks that in the short term, China should make the renminbi exchange rate more flexible.

On the other hand, China should also accelerate the launch of derivatives such as renminbi exchange rate futures and options, establish a market-oriented price formation mechanism for the renminbi exchange rate, adopt a uniform exchange rate between offshore and onshore renminbi and avoid speculation caused by the long-term price distortion in the offshore and onshore markets, Zhang added.

In the middle and long term, China should reconsider its strategy for renminbi internationalization that relies on the offshore market, Zhang thinks. Capital export, such as overseas investment, trade credit and issuance of renminbi bonds by foreign institutions, may be a better way to export renminbi.

Zhang Ming, Director of the Department of International Investment of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, said the Chinese Government is expected to continue its reform of the renminbi exchange rate formation mechanism this year, and the central bank may announce its decision in the first half to expand daily fluctuation of the yuan exchange rate against the U.S. dollar from 1 percent to 2 percent or even higher.

This means that the central bank will further relax intervention with the renminbi exchange rate, thereby allowing fluctuations to better reflect changes in market demand. Robust appreciation of the renminbi in 2013 may yet be avoided.

Email us at: lanxinzhen@bjreview.com

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