Understanding Finance from scratch

Chapter 42 Does Rising Exchange Rates Affect Our Lives—Finance for International Trade (2)
The theory of purchasing power parity appeared very early.Swedish scholar Kassel made a systematic exposition of it in 1922.The basic idea of ​​purchasing power parity is: the value of a currency lies in its purchasing power, so the exchange rate between different currencies depends on the ratio of their purchasing power, that is to say, there is a direct relationship between the exchange rate and the price level of each country.

Purchasing power parity is to collect and compare the price data of more than 150 categories and more than 2000 representative specifications (commodities and labor services) in the country through price surveys, and use the GDP of each country calculated by the expenditure method as the basis, and use the GDP as the basis for more than 150 The category-divided expenditure composition is used as the weight, and the weighted average is carried out to calculate the purchasing power parity of the GDP.

For example, if you buy a basket of goods with the same quantity and quality, you spend 80 yuan in China and 20 dollars in the United States. For this basket of goods, the purchasing power parity between the yuan and the dollar is 4:1. On these commodities, the purchasing power of 4 yuan is equivalent to 1 US dollar.Purchasing power parity is essentially a special spatial price index, which is different from the Consumer Price Index (CPl) which compares the price levels of a certain country in two periods. It compares the comprehensive price levels of two countries in a certain period.Therefore, using purchasing power parity as a currency conversion factor can meet the requirements of the three conditions for international comparison of GDP.

However, the theory of purchasing power parity has limitations, mainly because it is more difficult in actual operation and its practicability is limited.The exchange rate of purchasing power parity can have two forms: absolute purchasing power parity and relative purchasing power parity.As far as the exchange rate of absolute purchasing power parity is concerned, since it is determined by the ratio of the domestic purchasing power levels of the two currencies at the same time, it is affected by the price levels of the two countries. However, what is the so-called price level? Is the price based on the wholesale price or the retail price?Wait, the problem that is difficult to determine is that people in different countries value the same commodity differently.For example, a commodity that is a luxury item in country A may be a general commodity in another country.And purchasing power parity doesn't care about that.

Even with the correct purchasing power parity, GDP per capita can only indicate the overall output value of a country's economy, and cannot be used as a direct measure of the standard of living of the average person.Other indicators, such as the quality of housing and school buildings, the quality and level of public services, pollution levels, the strength of consumer protection laws, etc., are difficult to measure and are not reflected in the GNP.So even GNP per capita adjusted for purchasing power parity should be used with caution, as it is only one of many measures of quality of life.For example, in 2002, Japan's per capita GDP was US$40000, which was US$27000 after PPP adjustment, and US$35000, which was US$36000 after adjustment.However, the crime rate in the United States is higher than that of Japan, and the proportion of poor people and regions is larger than that of Japan. However, the per capita land area of ​​Japan is smaller than that of the United States, and the personal freedom enjoyed by its citizens is said to be inferior to that of the United States.And the quality of life also depends on subjective judgments and personal likes and dislikes.Finally, average GDP does not indicate whether property is distributed equally.

What does the appreciation of the RMB exchange rate mean?

1997 was an eventful year. Severe financial crises broke out in Southeast Asian countries one after another. The Thai currency, the baht, could not bear the pressure of depreciation and plummeted overnight.Since then, the currencies of Southeast Asian countries, including the Japanese Yen, have depreciated. For a time, the economic and financial situation in Southeast Asia was precarious.Countries around the world are also very pessimistic about the prospects of the renminbi, but the Chinese government solemnly declares that the renminbi will not depreciate.China's commitment has enhanced the confidence of countries in Southeast Asia and the world, and China has contributed to overcoming the financial crisis.

However, since 2002, the United States, Japan and other countries have continuously demanded the appreciation of the renminbi, so people can't help asking: What does the appreciation of the renminbi exchange rate mean?

We know that the exchange rate is a currency that expresses the price of a currency. Its importance lies in the fact that it affects the price of domestically produced commodities sold abroad and the cost of purchasing commodities in the country.

汇率的表示方法有直接标价法和间接标价法。比如2006年4月20日直接标价法下人民币兑美元的汇率是8.0126元/美元，意思是说这一天1美元可以换8.0126元人民币。2006年4月20日间接标价法下人民币对美元的汇率是0.124803美元/元，意思是说这一天1元人民币值0.124803美元。我国的外汇报价采用的都是直接标价法，也就是1元外币值多少元人民币的标价方法。

Under the direct pricing method, if the exchange rate value increases, it means that 1 unit of foreign currency is worth more domestic currency (local currency), which is called local currency depreciation, or foreign currency appreciation.The opposite is the appreciation of the domestic currency or the depreciation of the foreign currency.For example, on July 2005, 7, the exchange rate of RMB against the US dollar was 20:1, and it was adjusted to 8.2765:7 on July 21, indicating that the RMB has appreciated and the US dollar has depreciated.

So what does the appreciation of the renminbi mean?The most popular saying is that Chinese people's money is worth more. For example, in the international market (only in the international market can the purchasing power of RMB be reflected). In the past, RMB 1 could only buy a unit of goods. After the RMB appreciates, you can buy more. Multi-unit commodities, the appreciation or depreciation of the renminbi is directly reflected by the exchange rate.In the most popular terms, the appreciation of the renminbi is the increase in the purchasing power of the renminbi.In other words, you used to exchange 1 US dollar for 8.27 yuan, but now you can only exchange it for 6.62 yuan.

The importance of the exchange rate to a country goes without saying, and the appreciation of the renminbi has many impacts on China.

Appreciation will have an impact on different industries:
On the one hand, the increase in capital cost and income caused by the appreciation of the RMB will change my country's economic structure in the long run, endow industries with different growth rates, and differentiate the performance of enterprises in different industries.

On the other hand, the appreciation of RMB changes the book value of assets, liabilities, income, costs, etc. of enterprises in the industry in the short term, and affects their operating performance through foreign exchange translation differences.Renminbi appreciation will be long-term good for industries with a high proportion of imports, large foreign debts, or high liquidity or huge RMB assets; while it will have a greater impact on industries with high foreign currency assets or international pricing of products.A slight appreciation of the renminbi will also contribute to the transformation of China's economic growth pattern.Promoting the reform of the RMB exchange rate formation mechanism is necessary to alleviate the imbalance in foreign trade, expand domestic demand, enhance the international competitiveness of enterprises, and improve the level of opening up. It is conducive to making full use of the "two markets" and improving the level of opening up.

(1) Banking.The rise of the RMB exchange rate will increase the attractiveness of funds, and a large amount of funds will flow into the domestic banking system, which will have a positive impact on the development of banking business.The expectation of RMB appreciation will lead to a decrease in RMB loans and an increase in foreign currency loans; an increase in RMB deposits and a decrease in foreign currency deposits, thereby adjusting the currency structure of banks' assets and liabilities.

(2) Aviation industry.The appreciation of RMB will enable airlines with high foreign currency debt to pay less RMB to complete the original equal amount of foreign currency debt expenditure.

(3) Communication industry.The appreciation of the renminbi also brings about the appreciation of capital, which has an expansion effect on the investment of major operators in foreign countries, and has a positive role in promoting the construction of base stations, laying lines, networking and other infrastructure of operators in foreign markets.

(4) Coal industry.Renminbi appreciation has a greater impact on corporate external debt. Most of the high-end coal mining and washing equipment purchased by some large enterprises are imported, and the payment method is in the form of buyer or seller credit. Therefore, the appreciation of RMB will reduce the company's external debt pressure and reduce the annual Financial expenses.

(5) Chemical industry.Appreciation of RMB is conducive to enhancing the competitiveness of high value-added products in the international market in the domestic market, and will also weaken the price competitive advantage of resource chemical products in the international market.

(6) Pharmaceutical industry.The pharmaceutical industry has an exchange advantage, which is conducive to the import of medicines and reduces market prices.

(7) Textile industry.In the short term, the appreciation of the renminbi will inevitably bring certain pressure to the export-oriented enterprises in the industry, which will increase the cost and reduce the profit. The appreciation of the renminbi will put more pressure on the textile export enterprises.The increase in the profit rate of domestic products and the decrease in the profit rate of export products will lead to the "transfer from external to internal" of sales.

(8) Electronic manufacturing industry.Since the raw materials of high-value products in the electronics industry mainly depend on imports, their input costs will decrease with the appreciation of the RMB.

(9) Real estate industry.The appreciation of the renminbi will greatly increase the income level of residents, and real estate will be sought after by everyone as the main focus of consumption upgrades, thereby increasing the effective demand for real estate.

The appreciation of RMB will also have a certain impact on our living consumption.For example, the appreciation of the renminbi means that the international value of the renminbi has risen, which has increased savings income for residents saving in renminbi.For residents with foreign currency savings, it means that their savings have decreased.Therefore, for the common people, they will sell foreign currency to buy RMB to preserve their value.For families studying abroad, the appreciation of the renminbi enables residents to exchange more foreign currency, which is conducive to promoting study abroad.

Renminbi appreciation is also a boost to the tourism industry.The appreciation of RMB has two effects on my country's domestic tourism industry.For domestic residents, due to the increase in relative income, the cost of tourism has decreased, which has promoted the development of tourism.There is pressure to attract foreign tourists.Due to the relative depreciation of foreign currency, the cost of tourism has been increased and the development of tourism economy has been restrained.

The appreciation of the RMB will reduce the cost and price of imported parts or complete vehicles for domestic automobile production, and the rise in living standards of residents will lead to an increase in automobile consumption.In terms of real estate, it is cheaper to buy raw materials, which will promote the development of the real estate industry and stimulate the consumption of housing purchases, and may also lead to the emergence of a bubble economy.

Renminbi appreciation also has a certain impact on production and employment.This is not difficult to understand. On the one hand, the appreciation of the exchange rate and the appreciation of the RMB may expand the investment in production equipment, save production costs, benefit the capital turnover of enterprises, and increase economic benefits.But on the other hand, appreciation increases imports and restrains exports, which makes domestic industries adjust their production scales.The production of export-oriented products decreased, while the production of domestic-oriented products increased.The oversupply of commodities in the domestic market will once again lead to a drop in prices, a reduction in the profits of enterprises, a reduction in wages for workers, and an increase in the number of unemployed people in a certain industry sector, increasing the pressure on employment in society.

Appreciation of the renminbi can curb inflation.Under the condition of appreciation, domestic product prices are not affected, while the price of imported products falls due to the decline of the exchange rate, which will eventually drive down the prices of the entire society, thereby achieving the purpose of deflation.During the period of inflation, the appreciation of the local currency is undoubtedly a powerful weapon to avoid hyperinflation.

(End of this chapter)