The future of the RMB

16:07, April 09, 2010      

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By Ma Jie

Because of China's continually growing importance in the global economic arena, the discussion over the RMB exchange rate has taken precedence over all other issues.

Xia Bin (L) and Pieter Bottelier

During the Halter Financial Summit that opened in Shanghai on April 8, economists from China and the United States engaged in discussions on whether the RMB is undervalued and whether China should adopt a more flexible exchange rate policy.

The issue has long been a topic for discussion and has suddenly heated up once again amid the intensified international trade competition following the international financial crisis. Discussions on the issue have ramped up since the start of 2010.

Some U.S. government officials and congressmen have engaged in sharp criticism of China, believing that the RMB exchange rate is considerably undervalued. They are pushing the U.S. Treasury to release a report declaring that China is a currency manipulator. The argument has become a stumbling block for China-U.S. relations.

Is the RMB undervalued? If so, how much?

Xia Bin, a member of the Monetary Policy Committee under the People's Bank of China, said, "Internationally, different calculation methods have been used to draw conclusions that the RMB is undervalued. I have also paid attention to the model analysis conducted by some overseas scholars who have attached more importance to trade flows than financial flows. In many discussions, trade flows have been incorporated into numerous financial flows. We should consider this issue from another angle – The one-off and sharp RMB appreciation will hurt the United States, the world and China."

Over half of the profits from Chinese exports to the United States have flowed to enterprises founded by the United States in China. Against the backdrop of the international financial crisis in 2009, China's existing exchange rate system has helped the Chinese economy maintain a rapid recovery and accounted for a half of the global economic growth.

If the Chinese economy were hit by a one-off and sharp appreciation, it would hurt the entire world economy, U.S. consumers and Asia's anti-inflation efforts. RMB appreciation will neither address the fundamental issues facing the U.S. economy nor solve its serious unemployment issue.

However, Pieter Bottelier, former representative of the World Bank in China and a scholar of China studies, holds an opposite view – he believes that RMB is undervalued, but has no idea on how undervalued it is. The fact that the United States is imposing RMB appreciation pressure on China does not mean that it is in the interests of the United States. He believes that in light of its own interests, China should resume its RMB-appreciation policy.

Bottelier believes that China should adopt a more flexible exchange rate policy because it has become or will soon become the world's second largest economy. Meanwhile, it is possible for China to evolve into the world's largest economy in the next several decades, he added. "As such a large economy, China's pegged exchange rate with another currency such as the U.S dollar will be a barrier to the development of its own currency. I think that China should take a more independent stance on this issue."

There are great disagreements between Chinese and American economists on whether or not the RMB has been undervalued. However, the major disagreement lies in what is the right exchange-rate policy for China.

Xia holds that China must carefully choose an exchange-rate system that benefits itself and the whole world at the same time. There are two reasons behind China's long-term adherence to a managed floating exchange rate policy. First, China's economic structure does not fit the open global economy. Second, as a developing country, China seeks stable and sustainable development.

China lags far behind the so-called "dollar area" and Eurozone in terms of economic structure, capital flow and the flow of other elements. Meanwhile, as a huge economy, China cannot simply follow the examples of the "dollar area," Eurozone or other monetary unions. Instead, it should have its independent monetary policy.

Bottelier also expressed his support for the current exchange-rate policy of China. "It is certainly impractical for China to adopt a completely floating exchange-rate system because it would mean that China will have to give up control of interest rates and capital accounts, which may be conducted in the future, but not at present."

In fact, elite American politicians are aware of the impact RMB appreciation will have on the internal economic problems of the United States. Therefore, the U.S. Treasury Department has postponed the release of a report accusing China as a currency manipulator which was scheduled to be published on April 15. On the other hand, after U.S. Secretary of Treasury's China visit in early April, Chinese President Hu Jintao will attend a nuclear security summit in Washington in late April, further strengthening strategic negotiations between China and the U.S.


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