Tendency of RMB Exchange Rate

Wang Guogang

Institute of Finance & Banking

Chinese Academy of Social Sciences

April 2nd,2004

Content

I.Why RMB exchange rate issue II.Chinese economic status related to RMB

exchange rate III.Comments on RMB exchange rate issue

I.Why RMB exchange rate issue1.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 revaluation3 、 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

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.

II.Chinese economic status related to RMB exchange rate

1. Import and export in China from 1978 to 2003

0

10002000

30004000

50006000

70008000

9000

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3-20

-10

0

10

20

30

40

50

60

gross import & export import (billions of us dollar) export(billions usdollar)Import&export (%) growth of import (%) growth of export(%)

Gross import &export in China :1978-2003

Net Export from 1978 to 2003 unit:hundreds of millions of US dollar

-200

-100

0

100

200

300

400

500

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3

0

0.2

0.4

0.6

0.8

1

1.2

0

10

20

30

40

50

60

70

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3

dependence on foreign trading

China:1978-2003, Foreign Dependency Ration, %

2. Chinese economic status related to RMB exchange rate

0

100

200

300

400

500

600

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3-20020406080100120140160180

FDI(hundreds of millions ofUS dollar)growth(%)

FDI in China:1978-2003

0

20000

40000

60000

80000

100000

120000

0

5

10

15

20

25

30

35

40

45

savings(hundreds of millions of US dollars) adds growth(%)

Annual status of savings in China

- 50000

0

50000

100000

150000

200000

250000

suplus of savings

suplus of loans

margin between savings &loans

Loans of financial institutions

3.The supply of currency

0

50000

100000

150000

200000

250000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003051015202530354045

M0(hundreds of millions ) M1(hundreds of millions) M2(hundreds of millions)growth(%) growth(M1%) growth(M2%)

Suppl y of currency:1990-2003

0

50000

100000

150000

200000

250000

02_1

02_2

02_3

02_4

02_5

02_6

02_7

02_8

02_902_

1002_

1102_

12 03_1

03_2

03_3

03_4

03_5

03_6

03_7

03_8

03_903_

1003_

1103_

12-5

0

5

10

15

20

25

30

M0 M1 M2growth(M0%) growth(M1%) growth(M2%)

Suppl y of currency (monthl y):2000-2003

4.Foreign reserve

-5000

50010001500200025003000350040004500

1978197

9198

0198

1198

2198

3198

4198

5198

6198

7198

8198

9199

0199

1199

2199

3199

4199

5199

6199

7199

8199

9200

0200

1200

2200

3 -300

-200

-100

0

100

200

300

400

500

foreign reserve(hundreds of millions )growth(%)

Foreign reserve:1978-2003

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

8. 2768. 2778. 2788. 2798. 28

8. 2818. 2828. 283

710506

324 408

765985

1168

1997 1998 1999 2000 2001 2002 2003

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

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,pure free 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.

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.

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 ?

●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

3.How to rate the actual purchasing powerDifferent Prices of Hamburger:2001-2003

yearEconomy

April24,2003 2002 年 4 月 25 日 2001 年 4 月 19 日Local

currencyUS dollar Local

currencyUs dollar Local

currencyUS dollar

US 2.71 US Dollar

2.71 2.49 2.49 2.54 2.54

Argentina 4.10 Peso 1.43 2.50 0.78 2.50 2.50U.K. 1.99 Pound 3.14 1.99 2.88 1.99 2.85

China 9.90 Yuan 1.20 10.50 1.27 9.9 1.20Euro 2.71 Euro 2.97 2.67 2.37 2.57 2.27

Hong Kong 11.5 HK$ 1.47 11.2 1.40 10.70 1.37Indonesia 16,100 Lube 1.84 16,000 1.71 14,700 1.35

Japan 262 JPY 2.19 262 2.01 294 2.38Malaysia 5.04 Mark 1.33 5.04 1.33 4.25 1.19Philippine 65.00 Peso 1.24 65.00 1.28 59.00 1.17Thailand 59.00 Zhu 1.38 55.0 1.27 55.00 1.21Russia 41.00 Lube 1.32 39.00 1.25 35.00 1.21

●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.

Average foreign reserve per person Unit:US dollaryear 1997 1998 1999 2000 2001

P.R.China 112.56 115.61 122.29 129.58 165.11

China Hong Kong

14299.54 13701.22 14559.15 16123.24 16540.92

Japan 1648.81 1607.59 2192.72 2736.75 3044.82

Korea 428.58 1119.17 1572.78 2027.39 2164.91

France 462.33 658.50 574.17 545.33 445.40

Germany 851.24 781.92 641.50 604.37 529.56

U.K. 489.37 461.90 505.50 660.18 536.41

Indonesia 80.49 109.59 126.52 134.36 125.90

Malaysia 923.60 1114.88 1306.47 1230.12 1307.34

Philippine 97.20 121.10 175.29 169.50 172.68

Singapore 18702.66 18984.06 19317.52 19294.24 18123.66

Thailand 424.04 464.91 549.13 512.41 514.22

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

Thank You !