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People's Daily Online>>Opinion

Opinion: Protecting monetary sovereignty (2)

By Zhang Monan (China Daily)

11:29, November 27, 2011

Besides, China's expanded overseas investment has reduced the room available to appreciate the renminbi. Due to inconvertibility in its capital account, the large outflow volumes of renminbi assets have increased the risk of the Chinese currency's depreciation. Under these circumstances, any additional appreciation of the renminbi by a large margin would result in its overvaluation.

China's move to internationalize the renminbi will not be easy. As a way to reduce people's expectations for a one-way appreciation of its currency, the country should accelerate the reform of the renminbi's exchange rate formation mechanism, given that the differences of the exchange rate mechanisms at home and abroad mean more risk premium and uncertainties for the renminbi.

The exchange rate issue is in essence an issue of its price setting. Following the adoption of two rounds of quantitative easing by the US Federal Reserve Board, dollar-denominated assets worldwide have continued to flow into China, triggering a passive increase in the supply of the country's base currency. Statistics show that more than 80 percent of China's increased currency supplies are a passive monetary supply increase as the result of its swelling foreign reserves.

Currently, the global foreign exchange system is experiencing radical fluctuations and the sovereign debt crises in developed countries have not been resolved. In this context, the dollar and euro have alternated in their depreciation. In sharp contrast, the currencies of some major creditors in the world have remained basically stable. For example, the Swiss franc, the Japanese yen and the Chinese renminbi are believed by some to be the main currencies for hedging against risks.

However, the renminbi cannot be considered a hedge currency, because excessive appreciation as a result of its being regarded as an investment currency will increase pressures on domestic export-dependent sectors and contribute to a loose domestic monetary environment, which in turn will lead to further price pressure and inflation.

The right to set the price of the renminbi should not be in the hands of other countries. So China should try to increase the renminbi's elasticity, expedite a series of financial reforms, such as reforms of the renminbi's exchange rate formation mechanism, in a bid to safeguard its monetary sovereignty.

The author is an economic analyst with the State Information Center.

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wende at 2011-11-2871.251.41.*
By keep printing currency, USD is in effect devalued. Then US wants China to appreciate the exchange rate. These moves combined have evaporated trade surpluses of China. China must only consider its national interest only. China must not kowtow to western pressure and retaliate whenever there is an opening.

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