Evaluating the YuanEvaluating the 'people's currency'
BEIJING - For the first time since the 1997 Asian financial crisis, calls for the
Chinese currency to be revalued upward are drowning out calls for its
devaluation. But while those in both the appreciation and devaluation camps
have points in their favor, the argument may be academic until China's
exchange-rate system is revamped.
National Foreign Exchange Trading System statistics show that the yuan -
also known as the renminbi, or "people's currency" - hit a high of 8.2766 to
the US dollar in the third quarter of this year, up 29 basis points over the
beginning of the year. It is said that the black-market rate is now some 8.2
yuan to the dollar, lower than the official rate.
There are three bases to support the argument that the yuan faces
appreciation pressures.
First, a strong economy creates a strong currency, and China's economy is
growing at an estimated rate of 7.5 percent while it is predicted that the world
economy will post a growth rate of 1.4 percent this year. The strong
confidence in the Chinese economy plus the effects of China's World Trade
Organization (WTO) accession and successful 2008 Summer Olympic
Games bid will help attract global capital. According to the International
Monetary Fund (IMF), the comprehensive actual appreciation level of the
yuan has topped 20 percent since 1994 when China unified the two-tier
exchange-rate system. This matches China's economic growth in the period.
Second, the September 11 terrorist attack in the United States will quicken
the flow of international risk capital to China. After its WTO accession, China
will further expand the foreign investment fields and the channels for utilization
of foreign investment. The central government has forecast that foreign direct
investment in China may reach US$48 billion this year, an increase of $7
billion over last year. This is enough to offset the downward pressures of the
yuan resulting from export declines.
Third, a huge foreign-exchange reserve backs a strong yuan. China's state
foreign-exchange reserve has topped $200 billion, nearly nine times the figure
at the end of 1993. What's more, non-governmental foreign-exchange savings
have exceeded $84 billion and foreign-exchange deposits of institutions have
topped $700 billion. Experts hold that if the central bank did not purchase
foreign exchange from the market, the rise of the home currency would be
greater.
Regardless of the calls for appreciation of the yuan, there are also those
calling for its devaluation. Some experts point out that appreciation factors are
unable to offset the overestimate of the impact caused by the Asian financial
crisis in 1997 on China's currency. In that crisis, the value of the currencies of
neighboring countries that are very competitive against China in exports
plunged some 50-60 percent, while the exchange rate of the yuan was
overestimated at least by 45 percent.
Those calling for devaluation also hold that the global economic recession has
had a negative impact on China's exports and that state tax rebates to
stimulate exports represent a great burden on the national economy.
However, the arguments on both sides may assume too great a role for
market forces in determining the exchange rate for the yuan. China implements
a managed floating rate system, meaning that the yuan may fluctuate only
within the small range of 0.3 percent a day. Therefore, it is easier to predict
the trend of the yuan's exchange rate through watching the attitude of the
foreign-exchange authorities than through analyzing various economic
phenomena.
An official of the State Administration of Foreign Exchange disclosed recently
that, for the current period, the exchange rate would largely remain stable, and
at the same time the daily 0.3 percent fluctuation could be used fully to make
the market gradually comply with exchange-rate fluctuations. After China's
WTO accession, the exchange rate of the yuan will become more flexible to
reflect the demand and supply of the foreign exchange market.
Meeting a delegation of Hong Kong's banking industry on October 7, Guo
Shuqing, vice governor of the People's Bank of China and director of the
State Administration of Foreign Exchange, pointed out the macro-economic
situation and the demand-supply relationship in the interbank
foreign-exchange market indicate that the exchange rate of the yuan will
remain stable. In line with this, the exchange rate is unlikely to see any
substantial change in the near term.
The opinion of the monetary policy analysis team of the central bank coincides
with the remarks of officials of the State Administration of Foreign Exchange.
The team says in a report released at the end of October that because of the
September 11 incident, the US dollar may weaken and further stability of the
yuan's exchange rate is proposed. Observers note that this may imply that the
Chinese currency, which has long tended to track the greenback, may see
passive devaluation with the weakening of the US dollar.
In response to this, some experts say that though the yuan faces pressure for
appreciation, actual exchange-rate movement depends mainly on state policy.
For now, and even immediately after WTO accession, it is impossible for
China voluntarily to make the yuan appreciate. On the contrary, the
above-mentioned report of the central bank suggests that the exchange rate
will continue to track the US dollar. This means the yuan will see passive
devaluation with the weakening of the greenback. This will be favorable for
China, offsetting the challenges resulting from less market protection after the
WTO entry and benefiting exports.
While the stability of the yuan is favorable to China, it should also be seen that
the current exchange-rate formation mechanism needs to be improved. Only
when more market forces are introduced can the yuan's exchange rate
become more flexible and can exchange-rate fluctuations more truly reflect the
market demand and supply.