U.S. currency demands unreasonable

17:13, March 19, 2010      

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As the mid-term elections loom, some U.S. Congress members are trying their best to label China as a so-called "currency manipulator," and some western countries have also taken the opportunity to stir up trouble on the appreciation of the RMB exchange rate.

They argue that the yuan is "severely undervalued" and accuse China of an "unfair" competitive advantage in international trade, resulting in a huge trade deficit on the U.S. side.

The yuan has risen 21 percent against the U.S. dollar since China started the reform of the RMB exchange rate July 2005, and the real effective exchange rate (REER) has increased by 16 percent. Moreover, the REER of the yuan had only appreciated by 14.5 percent from July 2008 to February 2009 when the world economy was in a state of crisis, said the Chinese Premier Wen Jiabao during a press conference at the "two Sessions."

Would a sharp appreciation of the yuan cut the trade gap by a large margin as the west claims? The answer would be a definite and clear "no."

Most of all, the trade deficit of some developed countries is more a result of the economic structure and policies, and forcing the yuan to appreciate is not a conducive method to solve the trade imbalance. Taking China-U.S. trade for example, China's exports are mostly labor-intensive products, and the U.S. exports are mostly technology-intensive and capital-intensive high value-added products, which is consistent with the principles of complementary advantages and free trade. However, the U.S. has unilaterally put unreasonable restrictions on exporting high technology products to China, breaking the balance of trade between both countries. If the U.S. sticks to the discriminatory policy, it will be hard to solve the imbalance of trade.

In addition, it is doubtful whether the trade gap is as huge as some claim. According to statistics, 62 percent of China's export growth came from the trade diversions of China-based foreign-funded enterprises from 1999 to 2005, but not from China's own export growth.

The RMB exchange rate is not an ideal solution to trade deficits. This has been a basic consensus among the international academic and economic circles. Even if the yuan appreciates by 25 percent, the U.S. trade deficit with China will only shrink by 20 billion U.S. dollars in two years, according to a report published by Oxford Economics.
Therefore, the U.S.-China Business Council member companies do not view exchange rates as a major factor which affects their competitiveness in the Chinese market. On the contrary, many of these companies hold that politicizing exchange rate-related issues may cause negative impacts on their exports to China.

RMB appreciation will make no contribution to the resolution of problems concerning developed countries' trade deficits, and will cause bigger fluctuations in the global economy which has just gone through a worldwide downturn. For example, foreign-funded enterprises make up a large proportion of China's export enterprises and yuan appreciation means a rise in the prices of the products and services provided by these foreign-funded companies. This will affect trade flows worldwide and does no good for the global economy.

RMB appreciation will also increase expectation of the overall-appreciation of Asian currencies and further encourage speculation of short-term floating capital. Too much "hot money" will inevitably affect the stability of Asian or even global financial orders. Steve Forbes, president and editor-in-chief of business magazine Forbes holds that in the long run, exchange rates should stabilize. Short-term fluctuations in exchange rates can only result in chaos and RMB appreciation will be a mistake.

China is one of the major engines of the global economy and a stable RMB exchange rate will play a very important role in promoting the development of the global economy and in stabilizing the international currency system. The United Nations Conference on Trade and Development published a policy bulletin March 16, claiming that leaving the RMB exchange rate under the control of uncertain market factors will seriously affect the stability of China's domestic market and pose a threat to the stability of regional and global markets.

The international financial crisis has shown that the current imbalance in the global economy mainly lies in excessive consumption of some consumers and the shrinking of the real economy in some developed countries, and RMB appreciation cannot help solve these problems. Some developed countries should adjust their policies and reform their economic structure so as to bear relevant international responsibilities.

By People's Daily Online
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