Tendency of RMB Exchange Rate

1. Tendency of RMB Exchange Rate Wang Guogang Institute of Finance & Banking Chinese Academy of Social Sciences April 2nd,2004

2. Content I.Why RMB exchange rate issue II.Chinese economic status related to RMB exchange rate III.Comments on RMB exchange rate issue

3. I.Why RMB exchange rate issue 1.In 2002 ,the prevail argument of “export of deflation from China” spread. 2、In 2003，increasing pressure to revaluate RMB ● In Feb,2003,the minister of MOF of Japan raised the RMB exchange rate issue in Tokyo. ● In middle 2003，US and some other developed countries joined in pressuring RMB revaluation 3、The reasons to pressure the revaluation of RMB ● increase of BOP surplus,especially against the U.S.; trade surplus against U.S. reached as high as $100 billions

4. I.Why RMB exchange rate issue ● The cheaper prices of Chinese commodities，the real purchasing power is much stronger than US dollar. ● The rapid growth of Chinese foreign currency reserve affects the independence of Chinese monetary policy. 4、Arguments from different sides ● Louder voices from some governments and interest groups ● Louder voices from some speculators and investment banks. ● World Bank & IMF,Greenspan stressed on the importance to maintain the stability of RMB exchange rate during the transition to a more flexible RMB exchange rate determination mechanism.

5. II.Chinese economic status related to RMB exchange rate 1. Import and export in China from 1978 to 2003

8. 2. Chinese economic status related to RMB exchange rate

11. 3.The supply of currency

13. 4.Foreign reserve

14. 5.The tendency of RMB exchange rates vs. US dollar

15. Exchange in inter-bank foreign exchange market:1997-2003

16. III.Comments on RMB exchange rate issue 1、Exchange rate issue is sovereignty of any economy The determination mechanism of exchange rate is actually different from any exchange rate theories,which at least neglecting three pre-conditions: ●Sovereignty cannot be neglected in any markets,which reflected as tariff、non-tariff quota、anti-dumping、trading conflicts; therefore,purefree trade does not exist on the earth. ●the exchange rate should reflect the Immense diversity in economic growth、employment、foreign trade, and other political/economic conditions ●The net export is not the only factor to decide the exchange rate, economic development,political system,social and cultural factors would also do so.

17. Exchange rate is not an issue decided entirely by the international market: ● Each economy would choose its own exchange rate determination mechanism and exchange rate based on consideration of stability. ● Each economy would intervene the foreign exchange rate market whenever the exchange rate floats wildly. ● And also when one economy takes disadvantage of the exchange rate,some economy would pressure other economy to adjust the exchange rate by using political,diplomatic, economic measures and mass media.

18. 2. Government force should not be used to revaluate RMB exchange rate ●China is still a market-oriented economy After 1980’s, the RMB exchange rate was mainly determined by the central government. Since the reform of foreign currency management system in 1994, RMB exchange rate is determined by the market mechanism to some extents. Unexpectedly,there are some proposals to reevaluate the exchange rate of RMB through using government force. They even give us detailed band of exchange rate fluctuations, which makes us confused that how should we promote the marketing mechanism in the exchange rate determination reform if we utilize the government force to raise it ?

19. ●It is unacceptable to simply adjust the exchange rate of RMB by using government force instead of market mechanism. ● It is inconsistent with the goal and process of the RMB exchange rate system reform based on market force. ● It is inconsistent with the goal of independence of monetary policy ● With the rapid growing of foreign currency in the coming stage,it is rather important to make the foreign supply/demand equilibrium to promote the liberalization of foreign currency control. ● The exchange rate should be determined by demand, supply and central bank intervention jointly

20. 3.How to rate the actual purchasing power Different Prices of Hamburger:2001-2003

21. ●Average GDP per person in China just reached 1000 US Dollar in 2003,while it is almost 30,000 in the US. ● Even if 95% families in the big and medium sized cities use all their monthly income to buy hamburgers(10 Yuan/one),they can just get 200 or so. While Americans who are blue collars can afford more than 1000 hamburgers(2.71US dollar/one). ●But the prices of some commodities such as cars,residential houses,digital photos and computers are much more expensive than those in US,Japan and Europe. ●The above argument just reflects the unavailable explanations of so-called practical purchase power.

22. Average foreign reserve per personUnit:US dollar

23. 4、The pressure to raise RMB is weakening ●Several measures: ---To adopt some measures to solve trading conflicts; ---To accelerate the liberalization of capital control; ---To reduce the return-export-tax; ---To enrich the portfolio of foreign reserve. ●Several domestic changes of economic development; ---The rise of CPI; ---The change of international income/outcome; ---The possible slow-down growth of economy. ●The recovery of world economy

24. Thank You !