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UPDATED: October 21, 2010 Web Exclusive
Economist: Yuan Is Not Undervalued

All the accusations that the renminbi's exchange rate has been manipulated to stay at a low level and keeps going down are totally groundless and untrue, said He Weiwen, economics professor at the University of International Business and Economics, in an exclusive interview with People's Daily. Edited excerpts follow:

People's Daily: Recently, some people from developed countries have claimed that the real effective exchange rate (REER) of the renminbi has dropped and renminbi appreciation has been slow in recent years, citing statistics from the Bank for International Settlements (BIS). The U.S. Department of the Treasury also released a report on July 10 saying that the renminbi was undervalued. Do you agree?

He Weiwen: These conclusions are completely wrong. On July 15, the BIS released the REER indices of major currencies in June, according to which the renminbi's REER decreased 0.98 percent month-on-month to 118.8. However, that was mainly because of the appreciation of the euro, the Japanese yen and the British pound. As a matter of fact, the drop in the renminbi's REER indicated that the Chinese currency's exchange rate fluctuates in both directions and is increasingly able to reflect changes in the international market.

When calculating an economy's REER, the BIS regards its average exchange rate in 2005 as 100. Therefore, the renminbi's REER of 118.8 in June indicated that the currency had appreciated by 18.8 percent since China adopted reforms in its exchange rate regime in 2005. During the same period, the U.S. dollar depreciated by 5.69 percent; the euro depreciated by 7.41 percent; the Japanese yen appreciated by 0.61 percent; and the British pound depreciated by 18.62 percent. In summary, the renminbi has appreciated the most over the last five years among these currencies.

Over the ups and downs of the last five years, the renminbi's REER reached its pinnacle in February 2009 at 126.06, compared to which the REER had gone down by 5.76 percent by this June. Why? Because the renminbi was pegged to the U.S. dollar back in February 2009 and the U.S. dollar was very strong then. The REER of the U.S. dollar for that month was 99.42. Since the dollar index had dropped by 5.24 percent since then, it is not strange that the renminbi's exchange rate has fluctuated as well.

If we look further backward, the index of the renminbi's exchange rate was 75.97 in January 1994, when the indices for the U.S. dollar, the euro (then the European Currency Unit), the Japanese yen and the British pound were 94.21, 98.05, 128.05 and 90.99, respectively. Calculating based on the 1994 index, the renminbi's value has climbed by 56.38 percent over the last 16 years, while the U.S. dollar went up only 0.11 percent and the euro, Japanese yen and British pound went down by 5.57 percent, 21.43 percent and 10.56 percent, respectively. In other words, only the renminbi has appreciated dramatically, while the U.S. dollar has stayed at the same level and other major currencies have all depreciated.

Therefore, all the accusations that the renminbi's exchange rate has been manipulated to stay at a low level and keeps going down are totally groundless and untrue.

China's high foreign trade surplus has been an important weapon the Western countries have wielded to criticize the renminbi's exchange rate. Do you think the U.S. trade deficit with China is related to the renminbi's undervaluation?

China's foreign trade surplus grew briskly between 2005 and 2008. Interestingly, during the same period, the renminbi's value against the U.S. dollar climbed by a staggering 21.2 percent. In 2009, the renminbi's exchange rate against the U.S. dollar stayed the same while China's foreign surplus shrank by nearly $100 billion to $196.06 billion. Apparently, there is no direct link between the renminbi's exchange rate and China's trade surplus level.

Although China has maintained a large trade surplus, its trade balances with different partners vary significantly. During the first half of this year, China's total trade surplus was $53.3 billion. While the Chinese mainland's trade with Japan, South Korea and Taiwan yielded a total deficit of $101.46 billion, China's trade surpluses with the United States and EU were $77.05 billion and $62.03 billion, respectively. During the same period, the renminbi's exchange rate against the Japanese yen dropped, its exchange rate against the U.S. dollar remained stable, and its exchange rate against the euro picked up before declining. According to the trade-weighted exchange rates of the BIS, Chinese mainland's trade with Japan, South Korea and Taiwan accounts for 31.6 percent of the renminbi's exchange rate, while its trade with the United States and the eurozone accounts for 21 percent and 18.6 percent, respectively. China's trade with countries most responsible for its exchange rate's value has shown deficit. How, then, can people hold the exchange rates responsible for U.S. trade deficits with China?

As a matter of fact, the main reason behind China's foreign trade surplus is China's position in the international division of labor and the industrial chain. China's situation is similar to Canada and Mexico in their trade with the United States and Eastern European countries in their trade with Germany.

Between 1997 and 2009, U.S. exports overall grew by 53.7 percent, while its exports to China surged by 443.4 percent, 8.26 times its overall export growth. How could this happen if the renminbi were undervalued? During the same period, the growth rate of U.S. exports to China was 1.19 times that of U.S. imports from China, while U.S. imports overall went up at a speed 1.47 times that of its overall exports. This indicates that compared with the currencies of other major U.S. trading partners, the renminbi is not undervalued; indeed, its exchange rate level is favorable to the United States.

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