- For some time, various remarks have been bruited concerning appreciation of the Chinese currency Renminbi (RMB). Some international interest groups, with an eye to their own benefits, imposed upward pressure on the RMB and even politicized this economic issue. A short time ago, Governor of the People’s Bank of China Zhou Xiaochuan stated that the exchange rate of the RMB would not be reevaluated and that the rate would remain stable.

The current exchange rate of the RMB, based on market supply and demand, follows a unitary floating exchange rate system that is subject to management.

After experiencing the international pressure for appreciation, the RMB exchange rate seems to emerge amidst perplexing forces. However, the upward pressure still exists and will last for quite a long time.

Source of the Pressure
Tracing the international pressure for RMB appreciation, one finds that it began in Japan and later spread to Europe, the United States and elsewhere.

In recent years, the Japanese Government, to solve its domestic economic problems, deliberately induced devaluation of the yen, but the move has yielded minimal results. To diver their domestic difficulties, some Japanese government officials began to direct their target of attack on the RMB and went about selling their ideas worldwide, aiming to pressure the RMB to appreciate.

Readjustment of the US exchange rate policy has added pressure on RMB appreciation. The United States, while bent on balancing its fiscal and trade deficits, also tried to seek a solution in the exchange rate. It began to change the strong US dollar policy that had been carried out for nearly a decade and kept devaluation of the US dollar made some European and East Asian countries worry about competition from China’s export commodities. To a varying extent, they also joined the ranks calling for the appreciation of the RMB.

Obviously, international opinion has exaggerated the negative impact of the stable RMB exchange rate. In fact, the practice of maintaining the stability of the RMB exchange rate does not mean fixing it. Since the merging of the RMB exchange rate, a relatively flexible floating system has been in effect, with appreciation and devaluation vis-à-vis other currencies at different times in various degrees.

After the outbreak of the Asian financial crisis in 1997, the currency exchange rate of many countries and regions against the US dollar fell by more than a dozen of even several hundred percent. Under this circumstance, the Chinese Government promised not to devalue the RMB. Since then, the exchange rate of the RMB against the US dollar has been fluctuating within a narrow range. However, in general, the exchange rates of the RMB against the currencies of China’s main trading partners have risen. By the end of 2002, the nominal appreciation rate of the RMB against the US dollar, euro (or Deutsch mark) and yen had stood at 5.1 percent, 17.9 percent and 17 percent respectively. Taking into account the difference in the inflation rates of these countries, the actual appreciation rate of the RMB against these currencies during the same period was 18.5 percent, 39.4 percent and 62.9 percent respectively. During this period, the highest actual appreciation rate of the RMB against the three currencies reached 45.5 percent, 71.4 percent and 93 percent respectively. The devaluation of the US dollar since 2002 has only narrowed the range of the appreciation of the RMB against other currencies, but not changed the basic feature of the RMB exchange rate as a floating rate subject to management. Hence, the calls for the appreciation of the RMB exchange rate are voices in the wilderness.

Stability Benefits Economy
To maintain the stability of the RMB exchange rate evidently helps create a sound environment for China’s economic development. For enterprises, maintaining the basic stability of the RMB exchange rate is conducive to their cost accounting and expanding their foreign trade. For overseas investors, the practice can protect their investment interests. More importantly, the stability of the RMB exchange rate is conducive to the operation of the central bank’s monetary policy, to overcoming the tendency of deflation, and promoting China’s economic development and financial stability.

The economies of China and many developed countries are highly supplementary. These countries mainly import primary and light industrial products from China, which is conducive to adjusting their industrial structures and upgrading their economic development levels. Meanwhile, China’s low-cost labor and relatively cheap prices for export commodities help enhance the actual income level of the residents of importing countries, stimulate the growth of consumption in other fields and drive up economic growth. The appreciation of the RMB exchange rate would have wiped out these benefits.

At present, the global economy has resumed growing after experiencing a brief and mild recession. The prospects for revival, however, are unclear and unoptimistic, as uncertainties on the international financial market have increased. To maintain the brisk momentum of China’s economic development and the stability of the RMB exchange rate will help promote the growth of regional and world economies and maintain international financial stability, thereby extending support to the world economy as it is managing to recover and to the fluctuating international financial market. In this sense, the stability of the RMB exchange rate will benefit both Chinese enterprises and the global economy.

Completing the Exchange Rate System
The current exchange rate system suits China’s present stage of economic development, the bearing capacity of enterprises and the regulation level of financial institutions. However, the incomplete exchange rate formation mechanism has drawn great concern from management authorities.

Owing to the lack of an effective domestic and overseas foreign exchange market mechanism, the awareness of enterprises and residents against exchange rate risks is weak and their means for upgrading against risks on the market are insufficient. Insiders noted that on the premise of maintaining the basic stability of the RMB exchange rate, the current exchange rate system would be improved in due course, the foreign exchange market would be complete, and the floating range of the RMB exchange rate would be enlarged.

The reform of the foreign exchange management system will focus on the following aspects. First, continuing to reform management over foreign exchange used in overseas investment; second, further reforming the foreign debt system and the foreign guarantee management system; third, carrying out the qualified overseas institutional investors system; fourth, discussing measures for relaxing control over the overseas transfer of legal personal assets; sixth, introducing international institution to issue RMB bonds in China on a trial basis; and seventh, expanding the operational channels of transnational companies’ capacity in China.

The RMB exchange rate formation mechanism will be gradually perfected. Under a complete mechanism, the exchange rate will gradually and genuinely cater to the needs of the market, so will its appreciation and devaluation rates.