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Crack RMB Exchange Rate Continuous High Mystery

Author : Jessie Stone


RMB exchange rate issue is not caused by the reasons for China's trade surplus with the United States. But the Chinese side for the maintenance of the overall situation of Sino-US relations, appropriate to speed up the pace of yuan appreciation, on the one hand coordination as an important policy initiatives, in line with Premier Wen Jiabao met with Obama at the UN General Assembly, through dialogue and cooperation in Sino-US ties of speech; the other hand, the face of rising inflationary pressure in China the situation, the management also hopes to control RMB appreciation in order to achieve a certain effect.

U.S. House of Representatives Ways and Means Committee voted Sept. 24 to a so-called undervalued currencies of the countries that impose special tariffs on the bill, "Exchange Rate Reform Act to promote fair trade." The bill attempts to amend U.S. trade law, in order to give greater authority U.S. Department of Commerce, to enable it under certain conditions, the so-called "currency undervaluation" act as export subsidies, then the relevant countries for imposing countervailing duties on exports to the U.S.. And this bill is in the RMB exchange rate is at record exchange reform in July 2005 the case of a new high since passed, which makes one not understand.

Central parity of RMB against the U.S. dollar fluctuated after a change of trend appreciation for 9 consecutive days, were up 910 basis points. And starting from September 10 for 8 days a new high since the reform of foreign exchange earnings. September 21, China Foreign Exchange Trade Center announced central parity of RMB against the U.S. dollar has broken through the 6.70 mark to reach 6.6997. Just a few days, the RMB against the U.S. dollar rate of nearly 2%. Is the continuous appreciation of the RMB is indeed because the yuan is significantly undervalued it? If so, then, underestimate the magnitude of how many?

In accordance with the American Federation of Labor - Congress of Industrial Organizations president Richard Trumka recent formulation, the RMB exchange rate "is 40% undervalued." The basis for such judgments, the most well-known is probably the purchasing power parity exchange rate index (PPP). According to the World Bank's latest calculations, the RMB exchange rate was about 3.8 of purchasing power parity, the market exchange rate of RMB against U.S. dollar at about 6.8, click here to view more than 40% undervalued. However, PPP theory of exchange rates reflect long-term trend. According to this theory, a country's domestic price level determines the national currency's foreign exchange rate. So, to measure the existence of undervalued exchange rate, it should be closely linked changes in China's domestic price level. Since 1994, the merger of the RMB exchange rate and to implement a managed floating exchange rate system in China since the price changes, in addition to four years 1998,1999,2002,2009 appear as small negative growth in the CPI, the CPI is positive the rest of the number of years, sixteen years CPI increase of 68.8% and up. The same period, despite the overall U.S. prices are rising, but because China and other developing countries, a large number of cheap consumer goods inputs, making the United States, far below China's CPI increase. Therefore, in accordance with the PPP theory, the RMB against the U.S. dollar is not only not appreciated, but the devaluation. In fact, unification of exchange rates from 1994 when 1 U.S. dollar 8.7 yuan to 1 U.S. dollar against the current 6.70 yuan, RMB appreciation to buck the trend of nearly 30% of foreign. Obviously, even under the PPP theory to measure the current exchange rate not only underestimated the so-called problem does not exist, but may be overestimated.

Since the current RMB exchange rate has not been underestimated, then, the United States at this time to pass this legislation, is clearly not conducive to the rational solution of Sino-US trade imbalance between the two countries, but also will lead to China's opposition. Also, since the current exchange rate of RMB is not undervalued, then we should stand firm, according to the established policy of exchange rate reform act. Because, originally, we step on the RMB exchange reform has long been a stick to "independent initiative, controllability and gradual" principle continues to move forward and ensure that the RMB exchange rate at a reasonable and balanced level stable, and constantly enhance the RMB exchange rate flexibility. Since there is no underestimation of the RMB exchange rate, it also underestimated the magnitude of the problem does not exist naturally. The United States to discuss the undervaluation, let them discuss the good, and our reaction to it is, from government to private all remain "silent", you discuss your, I changed my. Otherwise, we go to see the so-called "U.S. Treasury Secretary Timothy Geithner determined that the undervaluation is difficult and there 5 years ago members of Congress proposed 40% undervalued against the dollar renminbi, has appreciated by 23% in today's case, still 40% is considered to be undervalued, "the farce it?

Also, since the current exchange rate not be underestimated, and why in recent days sharp appreciation of the RMB, even innovative high? Here are the main reason. First, China recently announced positive data boosted investor confidence in the global economic recovery, promote favorite currency inflows and boost the dollar lower. September 12, the world's major central banks aimed at strengthening banking supervision to the "Basel III" agreement. Through the new agreement on bank capital requirements are not as stringent as expected, thus further increasing investor optimism. But the Fed policy meeting will discuss follow-up quantitative easing policy, and further the dollar. Affected by the recent euro, British pound, Canadian dollar and other major currencies appreciated against the U.S. dollar showed a trend. The relative weakness of the U.S. dollar, the RMB will naturally "passive appreciation"; the second is in China's economic turnaround is based on further consolidation of the conditions, June 19, China's central bank announced further promote the reform of RMB exchange rate formation mechanism. It can be said that the strong appreciation of China's economic growth in the concrete embodiment of the RMB exchange rate, and the experience of the RMB against the U.S. dollar more than a year after the consolidation of technical indicators and market conditions, the concentrated reflection. Third, the Chinese side for the maintenance of the overall situation of Sino-US relations and make important policy coordination initiatives.

Appreciation of the renminbi on the U.S. one important reason is that the U.S. trade surplus with China there, but worth noting is that after foreign exchange reform in 2005, China's trade surplus rise, not fall, the average annual increase of 20.8%; yuan last year exchange rate basically stable, but China's trade surplus fell by 16.1%. This fully shows that the RMB exchange rate issue is not caused by the reasons for China's trade surplus with the United States. But the Chinese side for the maintenance of the overall situation of Sino-US relations, appropriate to speed up the pace of yuan appreciation, on the one hand coordination as an important policy initiatives, in line with Premier Wen Jiabao to attend the UN General Assembly a few days ago when Obama made during the meeting: "between the two countries Despite this kind of conflicts and differences, but can be a good solution through dialogue and cooperation, so that the Sino-US relations forward, "the speech; the other hand, in the current rising inflationary pressures in China's case, the management hopes to achieve a certain appreciation of the RMB control effect.


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Submitted : 2010-10-01    Word Count : 342    Times Viewed: 295