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An article by by H.E. Ambassador Song Zhe, Head of the Mission of the People's Republic of China to the European Union, on EUobserver
2010/03/30

Appreciating Renminbi will not address global economic imbalance

H.E. AMBASSADOR SONG ZHE

29.03.2010 @ 15:56 CET

EUOBSERVER / COMMENT - There has been intensive debate recently on revaluing the Chinese currency, the renminbi (RMB). I would like to participate by presenting China's views in brief.

China instituted a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies in 2005. Between July 2005 when the reform started and the end of February 2010, the RMB appreciated by 21.2 percent against the US dollar and 8.2 percent against the euro in cumulative terms. At the end of January 2010, RMB's nominal effective exchange rate and real effective exchange rate increased by 13.2 percent and 16.4 percent respectively.

 (Photo: ec.europa.eu)

"According to EU statistics, total EU export fell by 16% last year, but EU export to China increased by 4%"

The deterioration of the international financial crisis since July 2008 caused extreme uncertainties in the world economy. It also had huge impact on China, including tumbling export, FDI withdrawal and capital flight. As the situation worsened, the exchange rates between currencies of the G7 and other major economies experienced drastic fluctuations and the currency value of many economies dropped, adding to instability on the global financial markets. But China kept the value of the RMB basically stable, with its real effective exchange rate rising by 14.5%. In 2009, China's export dropped by 16%, but its import only fell by 11%, resulting in a decline of US$102 billion in trade surplus. What China did was a positive contribution to world economic recovery.

In 2009, China's statistics of the export from the European Union to China dropped by 1.53% only. According to EU statistics, total EU export fell by 16% last year, but EU export to China increased by 4%, and China was the only one among the EU's major trading partners to whom EU export had increased.

Limited impact on trade imbalance

It is proved in both theory and practice that appreciation of a country's currency has only limited impact on trade imbalance. If you looked at China, between 2005 and 2008, the RMB yuan appreciated by 21% against the US dollar, while there was an increase, not decrease, in China's external trade. In 2009, though the RMB exchange rate remained basically stable, China's trade surplus dropped by 34.2%. This shows that exchange rate is not the major factor that affects a country's trade balance, and to keep one's eyes on RMB appreciation alone won't solve the problem of trade deficit.

Major manifestations of imbalances in the global economy at present include the imbalance between consumption and savings in some major economies and the financial instability caused by excessive expansion of some financial institutions in pursuit of their own profits and by the lack of government oversight. If we look deeper into this issue, we will see that the biggest imbalance in the world is the imbalance in development, which has manifold and complex causes. To address these imbalances, countries need to act in a coordinated way, secure the good momentum in economic recovery, reform the international financial system and maintain global free trade. It is not possible for China alone to shoulder such responsibilities.

As the United States strives to overcome the crisis and revive its economy, it should champion free trade instead of raising obstacle to it. It should not consider just its own interests and ask others to raise the value of their currencies in order to boost US export. To politicize the exchange rate issue will do little service to coordination among the countries concerned to respond to the global crisis and tide over difficult times.

Despite signs of stabilization, uncertainties remain in the global economy today and what is to come is not very clear. The foundation for China's economic rebound is not yet sound. We hope to see the exchange rates remain basically stable between the world's major currencies, as this will help secure the momentum of world economic recovery and will facilitate reform of the RMB exchange rate formation mechanism.

China will continue to implement the present exchange rate regime. We will continue to reform the RMB exchange rate formation mechanism and keep the RMB exchange rate basically stable at an appropriate and balanced level.

The writer is Head of the Mission of the P.R. China to the European Union.

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