Transcript I.Why RMB exchange rate issue

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 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
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
9000
Gross import &export in China :1978-2003
60
8000
50
7000
40
6000
30
5000
20
4000
10
3000
2000
0
1000
-10
0
-20
78 79 80 81 82 83 84 85 86
87 88 89 90 91 92 93 94
95 96 97 98 99
0
gross import & export
import (billions of us dollar)
export(billions usdollar)
Import&export (%)
growth of import (%)
growth of export(%)
1
2
3
Net Export from 1978 to 2003
unit:hundreds of millions of US dollar
500
1.2
400
1
300
0.8
200
0.6
100
0.4
0
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
-100
0.2
-200
0
70
China:1978-2003, Foreign Dependency Ration, %
60
50
40
30
20
10
0
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
dependence on foreign trading
94
95
96
97
98
99
0
1
2
3
2. Chinese economic status related to RMB exchange
rate
600
FDI in China:1978-2003
500
400
300
200
100
0
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3
FDI(hundreds of millions of
US dollar)
growth(%)
180
160
140
120
100
80
60
40
20
0
-20
120000
Annual status of savings in China
45
40
100000
35
80000
30
25
60000
20
40000
15
10
20000
5
0
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
0
savings(hundreds of millions of US dollars)
adds
growth(%)
Loans of financial institutions
250000
200000
150000
suplus of savings
100000
suplus of loans
50000
margin between savings &loans
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
-50000
19
94
19
93
0
3.The supply of currency
Supply of currency:1990-2003
250000
45
40
200000
35
30
150000
25
20
100000
15
10
50000
5
0
0
1990
1991
1992
1993
M0(hundreds of millions )
growth(%)
1994
1995
1996
1997
1998
M1(hundreds of millions)
growth(M1%)
1999
2000
2001
2002
2003
M2(hundreds of millions)
growth(M2%)
250000
Supply of currency (monthly):2000-2003
30
25
200000
20
150000
15
100000
10
5
50000
0
-5
02
_1
02
_2
02
_3
02
_4
02
_5
02
_6
02
_7
02
_8
02
_9
02
_1
0
02
_1
1
02
_1
2
03
_1
03
_2
03
_3
03
_4
03
_5
03
_6
03
_7
03
_8
03
_9
03
_1
0
03
_1
1
03
_1
2
0
M0
growth(M0%)
M1
growth(M1%)
M2
growth(M2%)
4.Foreign reserve
4500
Foreign reserve:1978-2003
4000
500
400
3500
300
3000
2500
200
2000
100
1500
0
1000
-100
500
-200
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
0
-500
foreign reserve(hundreds of millions )
growth(%)
-300
5.The tendency of RMB exchange rates vs. US dollar
8.283
8.282
8.281
8.28
8.279
8.278
8.277
8.276
11 . 02 . 05 . 08 . 11 . 02 . 05 . 08 . 11 . 02 . 05 . 08 . 11 . 02 . 05 . 08 . 11 . 02 . 05 . 08 . 11 . 02 . 05 . 08
.
9 7 99 8 99 8 99 8 99 8 99 9 99 9 99 9 99 9 00 0 00 0 00 0 00 0 00 1 00 1 00 1 00 1 00 2 00 2 00 2 00 2 00 3 00 3 00 3
9
1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Exchange in inter-bank foreign exchange market:1997-2003
1168
985
765
710
506
324
408
1997 1998 1999 2000 2001 2002 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 preconditions:
● 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 power
Different Prices of Hamburger:2001-2003
year
Economy
April24,2003
US dollar
Argentina
Local
currency
2.71 US
Dollar
4.10 Peso
U.K.
2002年4月25日
Us dollar
2.71
Local
currency
2.49
1.43
1.99 Pound
China
2001年4月19日
US dollar
2.49
Local
currency
2.54
2.50
0.78
2.50
2.50
3.14
1.99
2.88
1.99
2.85
9.90 Yuan
1.20
10.50
1.27
9.9
1.20
Euro
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
1.37
Indonesia
16,100 Lube
1.84
16,000
1.71
14,700
1.35
Japan
262 JPY
2.19
262
2.01
294
2.38
Malaysia
5.04 Mark
1.33
5.04
1.33
4.25
1.19
Philippine
65.00 Peso
1.24
65.00
1.28
59.00
1.17
Thailand
59.00 Zhu
1.38
55.0
1.27
55.00
1.21
Russia
41.00 Lube
1.32
39.00
1.25
35.00
1.21
US
2.54
●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 dollar
year
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 !