tendency of rmb exchange rate wang guogang institute of finance & banking chinese academy of...
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Tendency of RMB Exchange Rate
Wang Guogang
Institute of Finance & Banking
Chinese Academy of Social Sciences
April 2nd,2004
Content
I.Why RMB exchange rate issue
II.Chinese economic status related to RMB exchange rate
III.Comments on RMB exchange rate issue
I.Why RMB exchange rate issue1.In 2002 ,the prevail argument of “export of
deflation from China” spread. 2 、 In 2003 , increasing pressure to revaluate
RMB ● In Feb,2003,the minister of MOF of Japan raised the RMB exchange rate issue in Tokyo. ● In middle 2003 , US and some other developed
countries joined in pressuring RMB revaluation3 、 The reasons to pressure the revaluation of
RMB ● increase of BOP surplus,especially against the U.S.; trade surplus against U.S. reached as high as $100
billions
I.Why RMB exchange rate issue
● The cheaper prices of Chinese commodities , the real
purchasing power is much stronger than US dollar.
● The rapid growth of Chinese foreign currency reserve
affects the independence of Chinese monetary policy.
4 、 Arguments from different sides
● Louder voices from some governments and interest groups
● Louder voices from some speculators and investment banks.
● World Bank & IMF,Greenspan stressed on the importance to
maintain the stability of RMB exchange rate during the
transition to a more flexible RMB exchange rate determination
mechanism.
II.Chinese economic status related to RMB exchange rate
1. Import and export in China from 1978 to 2003
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3-20
-10
0
10
20
30
40
50
60
gross import & export import (billions of us dollar) export(billions usdollar)
Import&export (%) growth of import (%) growth of export(%)
Gross import &export in China :1978-2003
Net Export from 1978 to 2003 unit:hundreds of millions of US dollar
-200
-100
0
100
200
300
400
500
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3
0
0.2
0.4
0.6
0.8
1
1.2
0
10
20
30
40
50
60
70
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3
dependence on foreign trading
China:1978-2003, Foreign Dependency Ration, %
2. Chinese economic status related to RMB exchange rate
0
100
200
300
400
500
600
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3
-20020406080100120140160180
FDI(hundreds of millions ofUS dollar)growth(%)
FDI in China:1978-2003
0
20000
40000
60000
80000
100000
120000
0
5
10
15
20
25
30
35
40
45
savings(hundreds of millions of US dollars) adds growth(%)
Annual status of savings in China
- 50000
0
50000
100000
150000
200000
250000
suplus of savings
suplus of loans
margin between savings &loans
Loans of financial institutions
3.The supply of currency
0
50000
100000
150000
200000
250000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030
5
10
15
20
25
30
35
40
45
M0(hundreds of millions ) M1(hundreds of millions) M2(hundreds of millions)growth(%) growth(M1%) growth(M2%)
Suppl y of currency:1990-2003
0
50000
100000
150000
200000
250000
02_1
02_2
02_3
02_4
02_5
02_6
02_7
02_8
02_9
02_1
002
_1102
_12
03_1
03_2
03_3
03_4
03_5
03_6
03_7
03_8
03_9
03_1
003
_1103
_12
-5
0
5
10
15
20
25
30
M0 M1 M2growth(M0%) growth(M1%) growth(M2%)
Suppl y of currency (monthl y):2000-2003
4.Foreign reserve
-500
0
500
1000
1500
2000
2500
3000
3500
4000
4500
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003 -300
-200
-100
0
100
200
300
400
500
foreign reserve(hundreds of millions )growth(%)
Foreign reserve:1978-2003
5.The tendency of RMB exchange rates vs. US dollar
8. 276
8. 277
8. 278
8. 279
8. 28
8. 281
8. 282
8. 283
710
506324
408
765
9851168
1997 1998 1999 2000 2001 2002 2003
Exchange in inter-bank foreign exchange market:1997-2003
III.Comments on RMB exchange rate issue
1 、 Exchange rate issue is sovereignty of any economy The determination mechanism of exchange rate is actually different
from any exchange rate theories,which at least neglecting three pre-
conditions:●Sovereignty cannot be neglected in any markets,which reflected
as tariff 、 non-tariff quota 、 anti-dumping 、 trading conflicts; therefore,pure free trade does not exist on the earth.
●the exchange rate should reflect the Immense diversity in economic growth 、 employment 、 foreign trade, and other political/economic conditions
●The net export is not the only factor to decide the exchange rate, economic development,political system, social and cultural factors would also do so.
Exchange rate is not an issue decided entirely by the international market:
● Each economy would choose its own exchange rate determination mechanism and exchange rate based on consideration of stability.
● Each economy would intervene the foreign exchange rate market whenever the exchange rate floats wildly.
● And also when one economy takes disadvantage of the exchange rate,some economy would pressure other economy to adjust the exchange rate by using political,diplomatic, economic measures and mass media.
2. Government force should not be used to revaluate RMB exchange rate
●China is still a market-oriented economy
After 1980’s, the RMB exchange rate was mainly determined by the central government.
Since the reform of foreign currency management system in 1994, RMB exchange rate is determined by the market mechanism to some extents.
Unexpectedly,there are some proposals to reevaluate the exchange rate of RMB through using government force. They even give us detailed band of exchange rate fluctuations, which makes us confused that how should we promote the marketing mechanism in the exchange rate determination reform if we utilize the government force to raise it ?
●It is unacceptable to simply adjust the exchange rate of RMB by using government force instead of market mechanism.
● It is inconsistent with the goal and process of the RMB exchange rate system reform based on market force.
● It is inconsistent with the goal of independence of monetary policy
● With the rapid growing of foreign currency in the coming stage,it is rather important to make the foreign supply/demand equilibrium
to promote the liberalization of foreign currency control.
● The exchange rate should be determined by demand, supply and central bank intervention jointly
3.How to rate the actual purchasing power
Different Prices of Hamburger:2001-2003 yearEconomy
April24,2003 2002 年 4 月 25 日 2001 年 4 月 19 日Local
currencyUS dollar Local
currencyUs dollar Local
currencyUS dollar
US 2.71 US Dollar
2.71 2.49 2.49 2.54 2.54
Argentina 4.10 Peso 1.43 2.50 0.78 2.50 2.50
U.K. 1.99 Pound 3.14 1.99 2.88 1.99 2.85
China 9.90 Yuan 1.20 10.50 1.27 9.9 1.20
Euro 2.71 Euro 2.97 2.67 2.37 2.57 2.27
Hong Kong 11.5 HK$ 1.47 11.2 1.40 10.70 1.37
Indonesia 16,100 Lube 1.84 16,000 1.71 14,700 1.35
Japan 262 JPY 2.19 262 2.01 294 2.38
Malaysia 5.04 Mark 1.33 5.04 1.33 4.25 1.19
Philippine 65.00 Peso 1.24 65.00 1.28 59.00 1.17
Thailand 59.00 Zhu 1.38 55.0 1.27 55.00 1.21
Russia 41.00 Lube 1.32 39.00 1.25 35.00 1.21
●Average GDP per person in China just reached 1000 US Dollar in 2003,while it is almost 30,000 in the US.
● Even if 95% families in the big and medium sized cities use all their monthly income to buy hamburgers(10 Yuan/one),they can just get 200 or so.
While Americans who are blue collars can afford more than 1000 hamburgers(2.71US dollar/one).
●But the prices of some commodities such as cars,residential houses,digital photos and computers are much more expensive than those in US,Japan and Europe.
●The above argument just reflects the unavailable explanations of so-called practical purchase power.
Average foreign reserve per person Unit:US dollaryear 1997 1998 1999 2000 2001
P.R.China 112.56 115.61 122.29 129.58 165.11
China
Hong Kong
14299.54 13701.22 14559.15 16123.24 16540.92
Japan 1648.81 1607.59 2192.72 2736.75 3044.82
Korea 428.58 1119.17 1572.78 2027.39 2164.91
France 462.33 658.50 574.17 545.33 445.40
Germany 851.24 781.92 641.50 604.37 529.56
U.K. 489.37 461.90 505.50 660.18 536.41
Indonesia 80.49 109.59 126.52 134.36 125.90
Malaysia 923.60 1114.88 1306.47 1230.12 1307.34
Philippine 97.20 121.10 175.29 169.50 172.68
Singapore 18702.66 18984.06 19317.52 19294.24 18123.66
Thailand 424.04 464.91 549.13 512.41 514.22
4 、 The pressure to raise RMB is weakening
●Several measures:
---To adopt some measures to solve trading conflicts; ---To accelerate the liberalization of capital control; ---To reduce the return-export-tax; ---To enrich the portfolio of foreign reserve.
●Several domestic changes of economic development;
---The rise of CPI; ---The change of international income/outcome; ---The possible slow-down growth of economy.●The recovery of world economy