Experts Advise against Staking on Appreciation of RMB

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Last updated at: (Beijing Time) Sunday, August 31, 2003

Experts Advise against Staking on Appreciation of RMB

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Chinese experts have warned that gambling on the exchange rate of the Chinese currency, renminbi (RMB), based on expectations of the currency's appreciation may result in heavy losses, since the RMB will not change by a big margin due to many factors.

There has been growing voice for the RMB's appreciation in the Western world where some people see China's balance of payments surplus on both current and capital accounts, and the country's rapid increase in foreign exchange reserve. Some are even engaged in speculation in the exchange rate of the Chinese currency, simply prompted by expectations of its appreciation.

However, the people should analyze the issue of the RMB's exchange rate against major hard currencies in an all-round and objective way, said Prof. Wei Jianing, vice director of Macroeconomic Department of the State Council's Development Research Center.

The current market situation where there is an oversupply of foreign exchange does not reflect the real relationship between supply and demand in China, as the government still have certain control over foreign exchange, which limits the exchange revenue and expense of companies and individuals, according to Wei.

Internationally, if the world economy recovered as expected, the interest level on the international market would go up and the exchange rate of the US dollar would stop dropping or even rebound. This could lead to changes in the flow of foreign exchange and the expectations of the RMB's exchange rate.

The solution of some deep-rooted problems in the process of China's reform, such as inefficient use of economic resources, lack of effective demand, employment pressure and non-performing bank loans, would also have a big impact on the exchange rate of the Chinese currency, Wei said.

The exchange rate of the Chinese currency has basically kept stable with rises by a small margin since 1994. It is widely accepted that China made great contribution to the economic and financial stabilization in Asia and the world at large as the government maintained the stable exchange rate during the Asian financial crisis when many countries and regions devalued their currencies against the US dollar by large margins.

Prof. He Liping, of the School of Economics under Beijing Normal University, said the change of exchange rate will bring about both positive and negative impacts on an economy.

As China's foreign trade, debt and creditor's rights are calculated in the US dollar and other hard currencies, the change in the RMB's exchange rate will bring more risks and a mixed impact to all countries concerned.

It is not an easy job to tell whether the outcome of exchange rate fluctuations is good or bad to a country, especially when there lacks an uniform standard for the reasonable level of exchange rates in the world, he said.

Yu Yongding, director of the Institute of World Economics and Political Studies under the Chinese Academy of Social Sciences, said continuous trade surplus or deficit in large amounts would affect the health development of the Chinese economy and is unfavorable to China's fundamental interests.

However, he said, China needs support and coordination from the international community in its effort for a balance of payments equilibrium. He called on countries concerned to create good conditions for China to expand import and export and overseas investment, eradicating irrational limitations imposed on China.

The experts agree that the flexibility of the RMB's exchange rate will be enhanced. Even though the currency will fluctuate by bigger margins in the future, it will go in a two-way manner. Any attempt to lay down the stake on expectations of the RMB's appreciation may produce heavy losses, instead of profits.

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