He Fan
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.
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.
China made such a choice because the former arrangement of
pegging to the US dollar might weaken China's flexibility in
monetary policies. And it has also realized that an undervalued
yuan will slow the industrial restructuring and cause vicious
competition among Chinese exporters.
However, this reform is only part of a much bigger effort to
upgrade the country's industrial structure. The exchange regime is
not going to finish the task single-handedly.
First of all, the exchange regime reform is not a solution to
tackle China's trade surplus. China's exports are mainly propelled
by the processing trade, which is not sensible to the exchange
rate. Even if the renminbi does rise dramatically, the processing
trade is not going to drop instantly and the trade surplus may not
diminish. Figures from Japan and China's Taiwan Province, where the
processing trade used to dominate, have also indicated a lasting
surplus in the case of an appreciation of local currency.
The exchange regime's reform will not put the lopsided
industrial structure into balance by itself. Theoretically, a
changing rate would help promote the development of industries that
are not trade-orientated, in China's case, the tertiary sector.
However, China's tertiary sector was fledgling for multiple
reasons, including inadequate supply of qualified talent and
underdeveloped infrastructure. Such factors are not easily improved
by the exchange regime reform.
Therefore, an objective view about exchange regime reform is
indispensable when people discuss the renminbi exchange rate.
The exchange rate equals a price between currencies in economic
theories. Price is the key to allocating resources, which would
bear remarkable significance for all resources in the market.
The Chinese government is determined to further this reform, but
only according to its own blueprint. The greater target might be
tarnished if the exchange regime reform is boiled down to the
appreciation of renminbi. How much should the yuan be appreciated?
How long will it rise? Similar questions should find their answers
from the progress in related fields. No one can give definite
answers before the progress is achieved.
It would be totally against the rule of the market economy when
a country, through a political course, asks the Chinese government
to change a key price in the economy. It is both unwise politically
and unrealistic to ask China to realize the targets for its
long-term reform in a short time.
The Strategic Economic Dialogue is a constructive innovation to
eliminate bilateral misunderstanding, pinpoint the strategic issues
of common concern and maximize the benefits of Sino-US cooperation.
It may cost the chance of cooperation if the US insists on
politicizing China's exchange regime reform and the political
shortsighted doggedness will also lead to the neglect of more
important issues.
The author is a researcher with the Institute of World
Economics and Politics at the China Academy of Social
Sciences
(China Daily August 7, 2007)
