China refutes claims RMB undervalued

13:04, July 26, 2011      

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As of July 21 of 2011, the RMB exchange rate reform had been implemented for 10 years. On that day, the average exchange rate of the RMB against the U.S. dollar was 6.4536, which was a new record since China exchange rate reform started. Since 2005, the RMB has appreciated by almost 22 percent against the U.S. dollar.

However, such a great RMB appreciation still has not satisfied the United States and European countries. Following the Western countries, the International Monetary Fund (IMF) once again imposed pressure on China, requiring that China should allow the RMB to further appreciate.

The Annual Appraisal Report of the IMF says that 24 executive directors of the IMF all generally believe that the exchange rate of the RMB against a basket of currencies is still severely underrated by between 3 percent and 23 percent.

According to the IMF, after the adjustments caused by inflation factors, the RMB actually has depreciated by about 2 percent against currencies of China's trade partners, but appreciated by about 8 percent against the U.S. dollar in the past year. According to a certain standard, the RMB "not only has not appreciated but also has depreciated" in the past year.

It is worth notice that the IMF has a different standpoint this time. In 2010, the executive directors of the 187 member countries of the IMF had different opinions regarding the issue "whether the RMB is underrated." But this time, all of them agree that the RMB is underrated.

The appraisal result of the IMF aroused strong opposing voices from China. On July 21, the Government of China abnormally authorized its representative in the IMF to publish a six-page statement, which fiercely refuted the IMF's report on the RMB exchange rate. The statement says that the stagnant consumption-orientated economic growth of China is caused by the global financial crisis.

"The global crisis and economic depression have negatively affected the financial performances and expenditure structures of emerging market economies. The external crisis has severely hindered China's reform, especially in the aspect of RMB exchange rate reform."

Regarding this issue, Huang Zeming, chief of the Institute of International Finance under the East China Normal University told reporters of the International Finance News that it is certain that the RMB exchange rate has been underrated, but there is no fixed standard that could be used to test whether the appraisal method is proper. Since the RMB has not realized free convertibility, rating the RMB is quite difficult. The conclusion made by the IMF is baseless and its data is actually meaningless.

The IMF suggests that the Government of China should alleviate its risks of inflation and a real estate bubble by appreciating the RMB because appreciating the RMB could help reduce the prices of oil, food and other imported products. The report says China's current exchange rate system may play a mildly effective role in dealing with the unbalanced global economy, but the underrated RMB has hindered the process of China's internal economic re-balance.

However, Sun Lijian, deputy dean of the School of Economics under Fudan University, said that in 2007, the United States urged Vietnam to revalue the dong to hedge against rising oil prices. As the speed of the dong appreciation was lower than the growth rate of crude oil prices, Vietnam slid into a financial crisis instead of benefiting from the appreciation of its currency.

The IMF's proposals cannot help China to effectively deal with imported inflation because as long as the United States and Europe continue to suffer debt crises, more hot money will flood into China, leading to high inflation and continued expansion of the money supply.

"The IMF should pay more attention to the low interest rates in European countries and urge the United States to stop its quantitative easing monetary policy as soon as possible," Sun said.

Certain analysts believe that the yuan appreciation might help curb inflation, but it will produce adverse effects on China's exports. Furthermore, rapid appreciation of the yuan will threaten the transformation of China's economic development pattern.

According to the IMF report, there are some side effects for China's central bank to maintain low interest rates. The fund said that China has kept bank deposit rates well below the level of inflation, which has reduced household savings and increased speculative funds on the real estate market. Huang explained that sharp increases in interest rates will boost the appreciation of the yuan and aggravate the economic bubble, which is why the central bank is more willing to raise the deposit reserve ratio than to increase interest rates.

Der Spiegel, a leading German weekly news magazine, reported that the United States, Japan and Europe are burdened with huge debt and even on the verge of bankruptcy, while China is worried because of excessive capital inflows, which is a sharp contrast. The debt crises plaguing Western countries are pushing up inflation in China.

The IMF also urged China to immediately move ahead with its five-year plan for financial reforms.

"In order to move ahead with financial reforms, a prerequisite for that will be to have a more appreciated yuan, which will reduce the pace of reserve accumulation, lessen the amount of liquidity injected into the financial system and allow China to move ahead in a safe way," said Nigel Chalk, the IMF mission chief for China.

Huang said that China should immediately implement financial reforms, including broader financial and capital account liberalization, interest rate marketization, and RMB exchange rate regime flexibilization.

By Wang Liying from National Finance News, translated by People's Daily Online

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