RMB Appreciation.doc

RMB AppreciationRecently, the appreciation of RMB is the focus of attention in the international community. On October 11, 2010, it was reported that the central parity of RMB against dollar is 6.6732. Compared with the exchange rate of October 8, it rose 98 basic points. RMB against dollar have reached a new level again.Coming to 21st century, the global economy is slowing down and in the Gloomy atmosphere. Many western countries are facing the deflationary pressure. On the contrary, Chinese economy is growing rapidly. The Balance of payments double surplus and the increasing of foreign exchange reserves became direct reason to cause RMB appreciation. Especially America and Japan, they thought Chinese exporter grab the world market by the “unfairly low price”, so they focus to RMB appreciation and make great pressure to Chinese government. Japanese government urged RMB appreciation, for this reason, they made some steps. On December 2, 2002, the Japanese vice Finance Minister Haruhiko Kuroda, Masahiro Kawai and his deputies published a article named “global Inflation at the right time” in the Financial Times of the British. On February 22, 2002, Japan Finance Minister Masajuro Shiokawa Proposed a Proposal in Group of Seven meeting that require other six countries to force appreciation of RMB. This is first time that this organization publicly discussed the economic issue beyond member. On March 2, 2003, Japanese Economic News published an article called China exports deflation to Asia and international”. Japanese government believe that China exports deflation to the world especially Asia, this is the main reason that Japan require RMB appreciation. Japan is the first advocate of appreciation of RMB. Can RMB appreciation help recovery of Japanese economy? We can see that the economic relationship between China and Japan is not competitors, but a complementary relationship. First, China mainly exports labor-intensive products. There is not competition with Japanese technology-intensive products in international market. Therefore, even if RMB appreciates, Japanese export can not be Corresponding growth. Moreover, once the RMB appreciation cause the slowing down of Chinese economy, Japan exports to China also will be affected. Considering the above two points, its not difficult to find that RMB appreciation will inhibit demand of Japanese product. On the supply and demand, the ascent of import price means increased cost, which will lead to shrinkage of the scale of production. From these, we can conclude that RMB appreciation will not sure have positive impact on Japanese economic recovery.The pressure of RMB appreciation shifted from Japan to the United States since June 2003. on June and July 2003, American Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan publicly made a statement that hope RMB can choose more flexible exchange rate system, and they thought nowadays exchange rate system will eventually damage the Chinese economy. Then American Secretary of Commerce and Minister of Labor also issue the similar point of view. In addition, some interest groups actively require Revaluation of RMB. And the Snows visit to China in September also was called “the trip of exchange rate”. They thought that Chinas currency manipulation cause the serious unemployment problem in Manufacturing. And RMB has been seriously underestimated. So US government gave greater pressure to urge the RMB appreciation. Recently, US pressure on the issue is becoming more and more intense. After financial crisis, China became the creditor of America. They want to reduce the US trade deficit by RMB appreciation. Chinese has implemented the RMB exchange rate reform since 2005. But from 2005 to 2008, the US trade surplus has increased except in 2009. We can see the RMB exchange rate is not the root causes of the U.S. trade deficit. So RMB appreciation doesnt reduce U.S. trade deficit, the United States require RMB appreciation and then to reduce Chinese exports, it doesnt means that American can produce these product by themselves to increase employment and consumption. Chinese reducing export will be shifted to other developing countries and at the same time, U.S. trade deficit shifts to other countries.The RMB appreciation will make Chinese product in America is more expensive and ultimately harm the American citizen interests. Therefore, the United States should produce more high-tech products to lost to the world instead of using political means to force the RMB appreciation, this is the best solution to global imbalances and create job opportunities for the American people.Although the RMB appreciation has the external pressure, the domestic factors can not be ignored. There are three main reasons. First, According to IMF estimates, RMB compared to other major trading partners, the nominal effective exchange rate fell by 6% in 2002. According to the measurement results of international organizations, RMB has been undervalued all the time. From 1998 to 2004, although China had been affected by the Asian financial crisis, the economies into recession of the United States, Japan and Europe and the SARS, the Chinese economy still remained growth of 7 % to 9%. Comparing Steady and rapid growth of Chinese economy with the world economic downturn, we can see that the trend of RMB appreciation. Second, the long-term equilibrium exchange rate is decided by the purchasing power of domestic currency and foreign currency, The Human Development Report of United Nations Development Program shows that Chinas per capita GDP is $ 1,352 in nominal exchange rate in 2005, if converted at purchasing power parity was $ 5,791, the nominal exchange rate is under valued for 4.06 times comparing with calculating by purchasing power parity. So RMB need to be appreciated. Finally, from the balance of payments, we can know that our countrys current account and capital account balance has maintained a large trade surplus since 1994. Especially recent years, China has become the worlds largest capital inflow country, and the FDI is up to 500 billion dollars each year. Therefore, according to the balance of payments, RMB has the trend of appreciation.The impact that the RMB appreciation bring to our country is more worthy of our consideration. There are three benefits. Domestic consumer will increase their demand for imported products. Because we will find their price become “cheap” .We will spend less money than before if we study abroad or travel. Second, RMB appreciation is beneficial for adjusting our countrys industrial structure. During a long time, our countrys export depends on labor-intensive products and export structure can not be optimized. This is a good chance for export enterprises to improve technology and product quality. Thus promoting the adjustment of Chinas industrial structure and improve Chinas position in the international division. Third, in recent years, anti-dumping cases against China increased dramatically. Proper appreciation of the RMB will not only help ease the tension between China and major trading partners but also to set up good international image. RMB appreciation is a double-edged sword. It also brings some defects. First, in the past long time, the product we export is lower than other countries in the international market. Once the RMB revaluated, the price of our countrys export product will increase, this will undermine the competitiveness. And that will affect the export enterprises, especially labor-intensive enterprises. Second, China accepts the most foreign direct investment in the world. After appreciation of RMB, the investment costs will increase and they will choose other developing countries. This is not conducive to the introduction of foreign direct investment. Third, the appreciation of RMB will reflect in domestic employment, domestic employment will face more pressure. Because the reducing of export will lead to lay off employees large-scale, and foreign-funded enterprises is one of sectors that provide new jobs. Fourth, RMB appreciation will not only make the money flow into the virtual economy, but also expanding the asset bubble that could eventually lead to bursting of the bubble, then lead to financial and currency crisis. Like the rapid appreciation of the Yen in 80 end of the 20th century. Fifth, Chinas foreign exchange reserve reached 2.4543 trillion dollars. Its the first of the world. Once the RMB appreciation, the huge foreign exchange reserves will face the threat of shrinking. This is a serious problem we have to face.The economic and trade relatio