RMB revaluation unexpected but just right
(People's Daily Online)
Updated: 2005-07-24 09:19

At 19:00 on July 21, 2005, the People's Bank of China (PBOC) announced a revaluation of the Chinese currency Renminbi (RMB) or yuan, which immediately jolted international finance markets. PBOC said, the RMB yuan will no longer be pegged to the US dollar, and at the same time it will be traded at a rate of 8.11 for the US dollar.

How to view the reform of RMB exchange rate this time, and what impact will it bring on China's economy?

Economists said the revaluation is unexpected but right.

The timing of the exchange rate reform this time was indeed unexpected, but totally reasonable. It is a good game of time, said Dr Gao Huiqing with the Department of Strategy & Development of the State Information Center.

In the light of the current domestic and international economic contexts, the opportunity for the reform of the RMB exchange rate is extremely valuable. Gao analyzed that internally, China is in a relatively critical and sensitive period in its economy and attention has been generally drawn to its future development with not much paid to the RMB exchange rate reform. It is widely agreed that it is impossible for China to make adjustment on its currency at this moment.

Internationally, recently the sustained strength of the US dollar to some extent has reduced pressure on the yuan appreciation and some speculative capital has started to withdraw. Plus, predictions on yuan revaluation by some international finance institutions since May have turned out to be invalid, which also leaves the topic not so popular.

It is a wise timing, a quick move out of our expectations, said Gao.

Gao's view was echoed by He Fan, assistant to the director of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences (CASS). He said, in the past couple of years, China has been under continued pressure from the outside world, which puts it into a dilemma as to when to adjust the RMB exchange rate. If the Chinese government did it, then it would just fit the wishes of international speculators; but if it did not , it would increase the difficulty for the country to make financial regulations.

The reform is of reason and it is what should be done as the conditions are ripe, but such a timing is totally rarely seen.

A spokesman for the PBOC also said that the present moment is a good opportunity to improve the rate-forming mechanism of RMB. Currently, China has been strengthening the construction of its foreign exchange market and its national economy also maintains a steady, rapid growth. On the other hand, the world economy runs well, and the US dollar interest rate keeps rising -- these have all created lucrative conditions for the reform of the reform.

In the economists' opinion, the yuan revaluation is beneficial to economic restructuring.

Compared to the influence of interest rate uplift on the national economy, adjustment in foreign exchange rate has a more extensive impact. As for China, it not only changes the value of the yuan against other currencies, but also will directly affect China's import-export trade.

Nevertheless, Ma Yu, researcher with Chinese Academy of International Trade and Economic Cooperation, held that the two-percent increase and the adjusted value of 8.11 yuan for one US dollar will not substantially affect its capital inflow and export as they are within a controllable extent. But "the RMB exchange rate switched to 'a basket of foreign currencies' is of great importance and its benefit lies in the great leeway based on the market and greater elasticity of the exchange rate.

"The moderate appreciation will also help China in its transformation of the pattern of economic growth," said Dr Gao Huiqing, "pushing the rate-forming mechanism of the yuan is of the necessity of easing the imbalance in China's foreign trade, expanding its domestic demand and enhancing its enterprises' global competitiveness and the country's level of opening-up. It is also conducive to China's making full use of 'the two markets.'"

The present situation of financial regulations also has underpined the necessity for the RMB exchange rate to be reformed. Starting from this year, China's foreign trade surplus took on a tendency of continuous expansion, totaling US$39.6 billion, which further damages the international balance of payments and intensifies trade frictions. Till the end of June, China's foreign exchange reserve had hit a record high of US$711 billion, US$101.1 billion up from the beginning of the year.

Based on the present situation, expert predicts China's foreign exchange reserve will continue to grow, possibly exceed that of Japan at the year-end, making China the country with the largest foreign exchange reserve in the world. This will definitely push China to the frontline of the complicated conflicts of international economy and finance. Continually rising foreign exchange reserve makes financial macro-control very difficult and incurs heavier pressure on monetary base.

He Fan said, the reform this time emphasizes adjustment in the mechanism. Proper adjustment of the level of RMB exchange rate and the reform of the rate-forming mechanism of the yuan are conducive to carrying out the strategy of sustainable economic development by mainly relying on expanding domestic demand and to optimizing the arrangement of resources.

Imported commodities might be cheaper, the economists held.

What impact will the moderate revaluation of RMB bring to people's daily life?

"There will be little impact on the general public, that is for sure," said Dr Gao Huiqing, "ordinary people do not have much US dollars and those who do, the two-percent change is not a big deal."

According to financial experts, the slight appreciation of RMB will on the contrary help stabilize the domestic prices and might make imported commodities cheaper. Especially, outbound travelers may find shopping less expensive and more convenient.

According to the economists, foreign-funded enterprises might be affected

As for the exchange rate adjustment, staff with enterprises engaged in foreign trade may be worried. Dr Gao Huiqing said such enterprises now normally have profits of three to five percent, which will be affected by the two-percent adjustment for a short term.

However, the reform is conducive to speeding up the transformation of the pattern of economic growth and can also promote those enterprises' active restructuring, which will benefit the long-term development. Moreover, foreign businesses will take the initiative to strengthen interactions with Chinese enterprises engaged in foreign trade to maintain smooth trade. Foreign businesses might also offer preference to them as compensation.

He Fan said, the adjustment of exchange rate might have some impact on people's mentality but it was made after the adaptability of the domestic enterprises in their restructuring is fully taken into consideration therefore it will not impose a major impact on the social scale.

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