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BIZCHINA / Weekly Roundup
Long-term RMB reform benefits China and US
By He Fan (China Daily)
Updated: 2007-08-07 17:40
The author He Fan is a researcher with the Institute of World Economics
and Politics at the China Academy of Social Sciences
The reform to China's exchange regime is being carried out in a
market-orientated means toward a long-term target. Turing it into a
political issue would only harm the process or even tarnish the ultimate
target itself.
China's exchange regime is one of the major topics in the Strategic
Economic Dialogue between China and the United States, which began in
September 2006. The talks are only one indication of the US government's
concern over China's exchange rate.
Before commenting on America's over-concern, it is necessary to examine
the gains and losses of the US on the renminbi exchange rate issue.
Special coverage:
RMB Revaluation
Related readings:
?China 'won't bow' to yuan pressure
?Yuan steady despite pressure
?Survey: RMB revaluation manageable for exporters
?Economists warn of risks of continued yuan appreciation
Will the United States reap great benefit from a significant renminbi
appreciation? Certainly not.
China will see reduced exports as a consequence of renminbi appreciation,
but the US will not stop buying the necessities it requires. US importers
may turn to other developing countries. But if the commodities from those
countries are more expensive than Chinese goods, the switch does not
improve the US's international balance by reducing its trade deficit.
If China loses its share of the international market for the yuan
appreciation, its economic growth will be slowed, cutting down its
imports from the US. It will not help reduce the US trade deficit, either.
Commodity trade aside, the renminbi's appreciation will also hurt the US
in capital account items. US direct investment will become less rewarding
after the yuan gains against the US dollar, decreasing US profit from
international investment.
As a matter of fact, the US has more to gain if China maintains the
renminbi at a stable level.
When the US manufacturers shift their factories into China for the
relatively lower costs here, US customers still enjoy the products by
importing them from China. The consumption of resources, energy and the
pollution to the environment during the manufacturing process are all
left in China.
When the yuan is stable, the US has a more important advantage.
Thanks to the trade surplus, China has accumulated a large sum of US
dollars and its world largest foreign exchange reserve is mostly in US
dollars. Such a big sum, a considerable portion of which is in the form
of US treasury bonds, contributes a great deal to maintaining the
position of the US dollar as an international currency.
Russia, Switzerland and several other countries have restructured their
foreign exchange reserve and reduced the US dollars they hold. China is
unlikely to follow suit as long as yuan's exchange rate is stable against
the US dollar.
The Chinese central bank will be forced to sell US dollars once the
renminbi appreciates dramatically, which might lead to a mass
depreciation of the US dollar against other currencies.
The Chinese government launched an exchange reform regime years ago. The
renminbi will be appreciated gradually, the exchange regime would evolve
in a managed floating exchange rate system and an effective foreign
currency market would be established.
(For more biz stories, please visit Industry Updates)
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