Why Chinas RMB Must Appreciate Further
Analysis
China's 100 Yuan, or Renminbi, notes, the largest denomination in Chinese currency. (Frederick M. Brown/Getty Images) Continuing its 22 percent appreciation over the past six years, Chinas currency, the renminbi (RMB) reached 6.4495 per dollar, the Foreign Exchange Trade System announced on July 22. Since the direct link (peg) to the dollar was ended in 2005, when 8.10 RMB were equivalent to one dollar, this is the highest exchange rate yet seen.
The Bureau of Statistics, at the same time, reported that Chinas foreign trade reserve now stands at more than three trillion dollars.
The Epoch Times interviewed two analysts who have examined these statistics and attempted to discern their effects on the Chinese economy.
A detailed analysis shows that in the past year, neglecting the impact of inflation, the RMB has actually depreciated by two percent with respect to Chinas trade partners, but its value relative to the dollar has appreciated eight percent.
Jian scrutinized the three methods the IMF used to value the RMB; they ranged from three percent undervalued to 23 percent. So no matter which valuation methodology is used, it is still undervalued, he says.
Jian further clarified: Specifically, since the exchange rate reform in July, 2005, the RMB has appreciated 22 percent against the dollar and 8 percent against the euro. But it depreciated 12 percent to the Japanese yen and depreciated 17.7 percent to the Brazilian lira. This shows that the RMB is not appreciating relative to every other currency.
Jian believes that The change in export structure due to changes in regional trade is the first reason for mainland Chinas continuous increase in foreign trade reserves.
Because the RMB has been undervalued for a long period of time, many investors predict that the RMB will appreciate; this prediction has caused them to invest in China. No matter what you specifically invest in, the appreciation of the RMB alone will bring great investment returns. This, Jian asserts, is the second reason for Chinas ever increasing foreign trade reserve.
Jian said, The third reason for the increasing foreign trade reserve is the internationalization of the RMB. Chinas exports bring in dollars, but imports are paid for with RMBs; the foreign trade surplus results in an increased reserve of the dollar.
Drexel University Business School Professor Frank Xie argues that the inflow of hot money brought in by the appreciation of the RMB did help drive the economy, but due to limits the Chinese Communist Party (CCP) placed on foreign investments, the scale of these investments is not very large.
In reality, much of the money is Chinese peoples own money. Many corrupt officials move their illegally-gotten funds outside the country, and then redirect it back as so-called hot money. Hence the increase in foreign exchange reserves is mainly the side effect of the exports.
As Jian sees it, Chinas major economic issues are that the RMB is undervalued and that interest rates are also very low (low interest rates prevent the RMB from appreciating too fast). Since the interest rate is lower than inflation, people all lean towards investing, in real-estate, stocks, etc., which also increased the real-estate bubble. The undervalued RMB has caused problems for the Chinese economic structure, leading to wasted resources and other instabilities.
Jian pointed out that the best way to solve the problem of Chinese economys growth structure is to first significantly appreciate the RMB. This is only way to better utilize the resources and increase the portion of GDP coming from domestic consumption.
The Bureau of Statistics, at the same time, reported that Chinas foreign trade reserve now stands at more than three trillion dollars.
The Epoch Times interviewed two analysts who have examined these statistics and attempted to discern their effects on the Chinese economy.
RMB Still Undervalued
Dr. Jian Tianlun, a former employee of the Peoples Bank of China and currently an economist in the U.S., has analyzed the recently published Article IV report on the Chinese economy by the International Monetary Fund (IMF).A detailed analysis shows that in the past year, neglecting the impact of inflation, the RMB has actually depreciated by two percent with respect to Chinas trade partners, but its value relative to the dollar has appreciated eight percent.
Jian scrutinized the three methods the IMF used to value the RMB; they ranged from three percent undervalued to 23 percent. So no matter which valuation methodology is used, it is still undervalued, he says.
Jian further clarified: Specifically, since the exchange rate reform in July, 2005, the RMB has appreciated 22 percent against the dollar and 8 percent against the euro. But it depreciated 12 percent to the Japanese yen and depreciated 17.7 percent to the Brazilian lira. This shows that the RMB is not appreciating relative to every other currency.
Forei! gn Excha nge
There has been a big change in Chinas trade relationships among its various trading partners, Jian says. From 2002 to first quarter of 2011, exports to the U.S have decreased from 23 percent to 18 percent of the total figure, while exports to Brazil have increased from 3 to 6 percent; exports to Europe increased from 18 percent to 22 percent; and exports to Asia decreased from 52 to 48 percent.Jian believes that The change in export structure due to changes in regional trade is the first reason for mainland Chinas continuous increase in foreign trade reserves.
Because the RMB has been undervalued for a long period of time, many investors predict that the RMB will appreciate; this prediction has caused them to invest in China. No matter what you specifically invest in, the appreciation of the RMB alone will bring great investment returns. This, Jian asserts, is the second reason for Chinas ever increasing foreign trade reserve.
Jian said, The third reason for the increasing foreign trade reserve is the internationalization of the RMB. Chinas exports bring in dollars, but imports are paid for with RMBs; the foreign trade surplus results in an increased reserve of the dollar.
Drexel University Business School Professor Frank Xie argues that the inflow of hot money brought in by the appreciation of the RMB did help drive the economy, but due to limits the Chinese Communist Party (CCP) placed on foreign investments, the scale of these investments is not very large.
In reality, much of the money is Chinese peoples own money. Many corrupt officials move their illegally-gotten funds outside the country, and then redirect it back as so-called hot money. Hence the increase in foreign exchange reserves is mainly the side effect of the exports.
RMB Exchange
Why did the reform initiated in 2005 not have an effect? To answer this, Professor Xie believes, one must recognize that the fundamental cause is still the CCPs manipulation of the exchan! ge rate.As Jian sees it, Chinas major economic issues are that the RMB is undervalued and that interest rates are also very low (low interest rates prevent the RMB from appreciating too fast). Since the interest rate is lower than inflation, people all lean towards investing, in real-estate, stocks, etc., which also increased the real-estate bubble. The undervalued RMB has caused problems for the Chinese economic structure, leading to wasted resources and other instabilities.
Jian pointed out that the best way to solve the problem of Chinese economys growth structure is to first significantly appreciate the RMB. This is only way to better utilize the resources and increase the portion of GDP coming from domestic consumption.
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