Understanding Finance from scratch

Chapter 43 Does Rising Exchange Rates Affect Our Lives—Finance for International Trade (3)
Renminbi appreciation can also absorb excess foreign exchange reserves.For a developing country like ours, appropriate foreign exchange reserves are necessary, and a large increase in foreign exchange reserves is a kind of idle resources, which is undoubtedly a great waste.Improving the purchasing power of the RMB in the international market through appreciation is undoubtedly an important way to digest excess foreign exchange reserves. It is not only conducive to absorbing overseas resources, but also can alleviate the bottleneck of domestic resources.

Finally, appreciation of the renminbi can reduce trade frictions.The huge trade surplus accumulated by China is often criticized by domestic political and interest groups in the United States, Europe, and Japan. There are more and more trade disputes. China’s frequent anti-dumping lawsuits and other trade disputes in recent years and in the future are all consistent This background is related, and it is more and more concentrated on the low pricing of the RMB exchange rate, making whether the RMB appreciates or not becomes the key to reducing trade frictions.

There are advantages and disadvantages, so what are the disadvantages of RMB appreciation?

(1) The country's foreign exchange reserves will be lost according to the extent of appreciation.

(2) The country's export products will be affected to a certain extent by the appreciation of the renminbi, that is, because of the appreciation of the renminbi, compared with foreign importers, the cost of exports will increase, and the export volume will decrease.However, because the labor cost of Chinese goods is very low, a 20% to 30% appreciation of the RMB will not greatly affect the competitiveness of Chinese goods.It can be said that the reduced export volume due to appreciation (not necessarily) will be filled by the recovered foreign exchange due to appreciation, and my country's foreign trade situation will not change greatly.

(3) It will affect my country's labor export to a certain extent, and affect foreign investment to a small extent (the same investment will increase investment costs due to the appreciation of the renminbi).

(4) Due to the appreciation of the renminbi, the purchasing power of the renminbi has been enhanced, which will lead to an increase in imports and reduce my country's trade deficit. (which is exactly what we need)

(5) Bank bad debts are rising, causing unemployment, FDI (foreign direct investment) declines, deflation in rural areas, the external role of the renminbi is weakening, and China's commitment to the WTO is difficult to achieve, which in turn brings financial instability in Southeast Asia. and a slowdown in the Asian economy.

(6) The appreciation of RMB will restrain my country's export.The main export target of our country is the United States.In recent years, the United States has experienced a trade deficit.Appreciation would slow this down.Relatively speaking, the rise in the value of my country's currency will stimulate foreign imports to my country.

(7) Vulnerable to financial shocks.The financial market is imperfect, and there are few financial instruments for hedging risks; the central bank has no experience in implementing monetary policy under a flexible exchange rate, and its ability has yet to be tested; domestic financial institutions have huge non-performing assets and the financial system is fragile.All these show that we do not yet have the ability to resist the impact of a large amount of "hot money" on the financial system under the expectation of fluctuations in the RMB exchange rate.

Why the Renminbi Continues to Appreciate

The RMB is pegged to the U.S. dollar.The renminbi has been on an appreciation trend for the past 10 years, and the appreciation of the renminbi is reflected in the form of a decline in the exchange rate of the renminbi, that is, the amount of renminbi exchanged for 1 US dollar decreases. The average RMB exchange rate was 1994 in 8.6212, 1995 in 8.3490, 1996 in 8.3143, and 2003 in 8.2770 (National Bureau of Statistics, 2004). The RMB exchange rate has dropped by 10% in the past 4.1 years.The RMB exchange rate has been relatively stable at 2001 for three consecutive years since 3, and the cumulative average of the RMB exchange rate from January to May 8.2770 was still 2004. Since 1, the RMB has once again faced pressure to appreciate, and international calls for RMB appreciation have been louder than ever. After a wave, the United States, the European Union, and Japan continued to exert pressure to force the renminbi to appreciate.Some people in theoretical circles at home and abroad have also estimated the "range of RMB appreciation" based on various models. The high estimate is more than 5%, and the low estimate is more than 8.2770%.

We have already analyzed the pros and cons of RMB appreciation, so why does RMB continue to appreciate?

The rise of the RMB exchange rate means the appreciation of the RMB, which has two meanings: on the one hand, the face value of the same amount of RMB exchanged for foreign currencies increases, and the market purchasing power of RMB increases.On the other hand, if analyzed from the opposite point of view, the amount of foreign currency exchanged for RMB decreases, which means depreciation relative to foreign currency, and the purchasing power of foreign currency relative to RMB weakens.

The root cause of the appreciation of the RMB exchange rate is the huge twin deficits of the United States. The trade deficit has turned the attention of the US government to China, where the economy and trade have been adjusted and developed. The rapid growth of the Sino-US trade deficit has become a scapegoat for the Bush administration.The purpose of the United States to put pressure on the RMB exchange rate to increase the value of the RMB is to reduce China's imports.It is not difficult to analyze from the theory of international trade that China's exports to the United States should decrease after the appreciation of the renminbi.The reason is that the price of goods imported into the United States has risen after being denominated in dollars, which has weakened market competitiveness and restrained imports.

The trend of RMB appreciation is inevitable. In recent years, China's economy has maintained a good momentum of development for a long time.High-speed economic development has brought about a huge trade surplus and a large increase in foreign exchange reserves. However, the exchange rate of the RMB has always been pegged to the US dollar and remains unchanged at 8.28.From the perspective of purchasing power parity theory, RMB appreciation is appropriate and reasonable: long-term economic growth increases the purchasing power of RMB, and the upward adjustment of RMB exchange rate can improve the terms of trade; curb inflation; digest excess foreign exchange reserves; promote the rational allocation of resources ; Reduce the interference of foreign exchange purchases on the autonomy of monetary policy; reduce trade frictions.However, if the renminbi appreciates sharply in the short term, it is not advisable. Only by maintaining a stable exchange rate mechanism can the healthy development of the economy be guaranteed.

The reasons for the appreciation of the renminbi come from the internal dynamics of the Chinese economic system as well as external pressures.Internal factors include the balance of payments, foreign exchange reserves, price levels and inflation, economic growth and interest rates.From 1994 to now, the current account in China's balance of payments has been in surplus, and China's foreign exchange reserves reached 2002 billion US dollars in 2864, an increase of 1994 times compared with 5.55.From the perspective of RMB Purchasing Power Parity (PPP), China's price level is only equivalent to 21% of that of the United States (World Bank, 2002).From the perspective of inflation rate differences, the average inflation rate of the United States since 1998 was 2.23%, while the average inflation rate (CPI) of China in the same period was -0.3%, which was 2.53% lower than that of the United States. From 1978 to 2003, my country's gross domestic product (GDP) grew at an average annual rate of 9.3%.Over the past 25 years, my country's economic growth has undoubtedly been the fastest in the world.Judging from the interest rate difference between China and the United States, China's interbank lending rate was 2002% at the end of 2.7, while the US federal funds rate was 1.25%.Short-term interest rates in China are 1.5 percentage points higher than U.S. rates.Domestically, the RMB deposit rate is also 1.4 percentage points higher than the US dollar deposit rate.In addition, since the first half of 2002, the dollar has weakened from strength to strength, and the renminbi has depreciated along with the dollar, which deviates from the trend of renminbi appreciation.In the case of China’s rapid growth in relative labor productivity (from 1993 to 1999, the growth rate of China’s manufacturing labor productivity was at least 1.5 percentage points higher than that of the U.S. manufacturing industry in the same period), the renminbi depreciated along with the U.S. dollar, making the trade deficit of countries with trade deficits more and more The bigger, these constitute the external pressure of RMB appreciation.

From an economic point of view, the appreciation of the renminbi may be based on the following aspects:
(1) The RMB exchange rate has not been adjusted for nearly 1994 years since 10, and China's economy and national strength have undergone profound changes in the past 10 years.

(2) Since the 20s, some authoritative international institutions and trading partners have always believed that the RMB is undervalued to varying degrees.

(3) According to the theory of international economics, excessive foreign exchange surplus itself indicates that the foreign currency is priced too high, the local currency is priced too low, and the local currency has appreciation pressure.

(4) Since 2001, all major currencies in the world, including those of Southeast Asian countries, have greatly appreciated against the US dollar. Only the exchange rate of the RMB against the US dollar has not been adjusted, that is, the RMB has actually followed the US dollar and depreciated significantly against other currencies.Not to mention whether the renminbi was overly devalued or underpriced in the 20s, but in recent years, the currencies of other countries have appreciated significantly against the U.S. dollar, and only the exchange rate of the renminbi against the U.S. dollar has not moved. The value of the dollar is likely to be undervalued.

The RMB exchange rate issue is not only an economic issue, but also an international political issue.Some scholars pointed out that there are other reasons behind the frequent calls of some Western countries for the appreciation of the renminbi.Some are out of jealousy, some are to deflect domestic blame on the authorities, and some are to win votes for domestic manufacturing.For example, Western countries simply associate the level of the RMB with the decline of their own manufacturing industry in an attempt to force the RMB to appreciate.It is not China that is causing the loss of American job opportunities, but the invisible hand of global competition.The reasons for foreign clamor for RMB appreciation are nothing more than the following: First, the RMB exchange rate is too low.Someone suggested that the RMB exchange rate should be set at around 1 yuan per US dollar.The second is that China's foreign exchange reserves are too high. Since China's accession to the WTO, there has been no surge in imports. On the contrary, the trade surplus has increased significantly.Third, China's massive export of cheap goods has caused deflation in the world.Some people believe that in recent years, China's massive export of cheap products has led to deflation in Japan, Europe and the United States, and China should appreciate the renminbi and assume corresponding responsibilities in the world economy.

The reason why the U.S. puts pressure on the appreciation of the renminbi is that China’s policy of “pegging the exchange rate to the U.S. dollar” has failed to fully exert the positive effect of the depreciation of the U.S. dollar. "Export", especially when the US dollar depreciated in 2002, the US foreign trade deficit hit a historical peak of 4352 billion US dollars, and the trade deficit with China reached 1031 billion US dollars.In fact, the reason for the sharp increase in the U.S. foreign trade deficit is not China’s RMB exchange rate policy itself, but the result of a combination of factors such as the adjustment of the U.S. industrial structure, the expansion of foreign direct investment, the growth of personal consumption expenditures, and the J-curve effect of the depreciation of the U.S. dollar. .

Financial hegemony is an extension of military hegemony and economic hegemony. Relying on its dominant position in the international monetary system, the United States enforces its policies arbitrarily and in accordance with its own will, continuously obtains hegemonic profits, and maintains its "financial hegemony" status.Through the devaluation of the US dollar, the United States can not only reduce its foreign debt burden, each time the US dollar depreciates sharply, it can reduce the US debt by 1/3, and it can also stimulate the export of its products, and can also pass on its various economic crises and become its exploitation of other countries. main form.The fundamental purpose of the renminbi exchange rate dispute is that the United States hopes to prevent large-scale imports of Chinese goods into the United States through the appreciation of the renminbi.Putting pressure on the appreciation of the renminbi together with the US anti-dumping policy towards China constitutes a new content of the Bush administration's economic and trade policy adjustment towards China.

In recent years, China's foreign economic frictions have intensified, but most of them are limited to microeconomic frictions.After joining the WTO, China is in the stage of major system adjustment, and institutional factors are getting more and more attention in China's economic development.The United States, Japan, Europe and other countries put pressure on the appreciation of the renminbi, making institutional economic frictions begin to increase the share of China's foreign economic frictions.

(End of this chapter)