RMB appreciation futile to slash China's trade surplus

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Last updated at: (Beijing Time) Saturday, September 27, 2003

RMB appreciation futile to slash China's trade surplus

If one US dollar was worth five yuan instead of eight, would any "made-in-China" products just disappear from developed countries' shelves?

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If one US dollar was worth five yuan instead of eight, would any "made-in-China" products just disappear from developed countries' shelves?

Probably not, said Xiaogeng, assistant professor in the School of Economics and Finance at the University of Hong Kong

He said China's abundant labor supply and weak banking system would render the appreciation policy ineffective.

According to Xiao, a rising nominal exchange rate would not raise China's low wage cost based on the abundant labor supply. The competitiveness of China's exports would remain intact.

Morgan Stanley global chief economist Steven Roach also predicted that China's exports would lose almost no market share if its currency appreciated 15 percent.

As Xiao explained, the wage for poorly educated rural laborers is determined by their basic needs and the wage for urban workers is stabilized at a low level due to flooding rural labor and rising unemployment. Expanding primary and higher education provide China with a large low-paid but well-educated workforce.

Therefore, more job opportunities in the backward central and western parts of China, rather than appreciating the exchange rate, would help to slash China's trade surplus.

Xiao also said a rising yuan may well cause a greater surplus because of the inefficient banking system.

A rising yuan may depress the most vigorous parts of China's economy, and in turn depress investment demand. The consequently slowed bank loans and excessive savings could add to the trade surplus.

Xiao suggested that reforming China's inefficient banking system should be the first step in easing the trade surplus.

Zhou Xiaochuan, governor of the People's Bank of China, said early this month that the yuan will not float until the state-owned commercial banks increase their competitiveness and establish a risk-control regime.

Xiao said the decision to maintain a stable Renminbi is far-sighted and pragmatic. It will shield speculation risks and pave the way for the Renminbi's ultimate convertibility in China's capital account.

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