.contact us |.about us
News > Business News ...
Search:
    Advertisement
Stable renminbi exchange rate crucial
( 2003-09-22 10:08) (China Daily)

The exchange rate mechanism is an important tool for a nation's macroeconomic management. A country's exchange rate system and policy should be prudently decided in accordance with its economic development level, economic performance and international payment situation.

China's current exchange rate system was formulated in 1994. Prior to that, the nation was following a dual-track exchange rate system. On January 1, 1994, the unification of the two tracks was completed. In April, the foreign exchange market was established, starting demand-and-supply based exchange rate adjustments.

From 1994 to 1997, the yuan's exchange rate rose to 8.3 against the US dollar from 8.7, appreciating by 4.8 per cent.

Afterwards, the floating range of the currency started to narrow, especially after the Asian financial crisis broke out in late 1997, when, in response to calls from neighbouring countries, the Hong Kong Special Administrative Region and international organizations, the floating range was narrowed by a broad margin.

The basic stability of the yuan's exchange rate is not only a major factor supporting the Chinese economy's 7-8 per cent steady annual growth, but a main reason for China's foreign trade growth, foreign direct investment, international balance surpluses and rapid increases in foreign reserves.

The Chinese economy's rapid, sustainable and health development demonstrates that such an exchange rate arrangement is in line with the levels of Chinese economy's development and financial supervision as well as businesses' tolerance, and fits in well with China's current national conditions.

China's renminbi exchange rate system, in summary, is a market-based, single, managed, floating system. Its functioning is based on two structures: the bank forex settlement system (businesses are required to sell most of their forex earnings to banks and in case of investing overseas, they can buy forex, showing necessary government documents of permission), which facilitated the yuan's convertibility on the current account; and a unified national interbank forex market.

If the renminbi appreciates, foreign-related industries and departments are the first to be affected. But given the ripple effect, we should say it will affect all industries and all aspects of the economy.

Firstly, the yuan's appreciation will cause serious damage to Chinese manufacturing industries. In terms of the international division of labour, China, as a developing country, is manufacturing-based and has the advantage on labour costs.

The products of labour-intensive enterprises are typically low-end and low value-added. If the renminbi appreciates, exporters' production and labour costs will rise accordingly. If prices on the international market are unchanged, the decline in exporting profits will severely cripple the growth of manufacturing industries, such as textiles, clothing, chemicals, steel and rubber.

In that case, the global competitiveness of Chinese manufacturing may gradually disappear.

Secondly, due to appreciation expectations, property firms may start a new round of "land-acquiring movement." Real estate investments will peak and foster the economic bubble, which will be a heavy blow to future economic growth.

Thirdly, the currency appreciation may have an impact on Chinese agriculture. On the one hand, the price advantage of agricultural exports may disappear; on the other hand, the cheaper imported agricultural goods may overwhelm local products and will force a number of farmers, especially those in eastern areas, away from their land and move into cities at a faster pace.

Finally, due to an increase in transport costs, the number of foreign tourists may fall noticeably.

For Chinese citizens, the yuan's appreciation will, in the short term, increase the purchasing power of the currency and, therefore, amplify per capita gross domestic product denominated in the US dollars. Meanwhile, imported commodities will become cheaper and people will need less renminbi to exchange for foreign currencies when they travel or study abroad - meaning, in a sense, the renminbi will become more "valuable."

However, in the long term, if the appreciation has a sizable negative impact on exports, international balance of payments and economic growth, employment and incomes will certainly suffer. Then, it is not a matter of how valuable the money in your pocket is, but how much money you have in your pocket.

Since the beginning of the year, international "hot money" has continued to flow in, and some Chinese residents converted their forex assets into renminbi, which is "profit-seeking" and "exchange rate risk-avoiding" behaviours.

To prevent that from getting worse, top government leaders, officials from related authorities and economists have been sending the same signal recently: the exchange rate of the renminbi will remain basically stable. The purpose - to dissolve expectations that the yuan will appreciate in order to prevent further hot money inflows and stabilize domestic citizens' forex deposits.

In 1998, after fully considering the needs of China's economic development and the requests from other countries, the Chinese Government made its solemn pledge not to devalue the renminbi, making a positive contribution to global financial stability and economic growth.

Despite the current pressure for the renminbi to appreciate, China will not give in, but will make its own choice in the interests of its national sovereignty and economy.

The author is a senior analyst with the State Information Centre

 
Close  
   
  Today's Top News   Top Business News
   
+WHO: Bird flu death rises to 15; vaccination recommended
(2004-02-05)
+Solana: EU ready to lift China arms embargo
(2004-02-05)
+Nation tops TV, cell phone, monitor production
(2004-02-05)
+Absence ... still makes China hot
(2004-02-05)
+Hu: Developing world in key role
(2004-02-04)
+KFC: We operate normally in China despite bird flu outbreaks
(2004-02-05)
+Starbucks takes aim at China chain
(2004-02-05)
+Former Microsoft China chief gets new job
(2004-02-05)
+Private airline prepared for take off
(2004-02-05)
+Investors lured by call of siren
(2004-02-05)
   
  Go to Another Section  
     
 
 
     
  Article Tools  
     
 
 
     
  Related Articles  
     
 

+No grounds to revalue yuan, experts declare
2003-09-15

+Commentary: Why China should not devalue the yuan
2003-09-15

+Mundell: China should maintain exchange rates for yuan
2003-09-15

+Expert: More imports from US 'a way out'
2003-09-16

+Forbes: Keep RMB rate stable
2003-09-17

+Chinese banks not ready for major currency changes
2003-09-18

+Deflation pressures ease
2003-09-18

+ADB chief: China should be cautious in RMB liberalization
2003-09-20

   
        .contact us |.about us
  Copyright By chinadaily.com.cn. All rights reserved