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News letter Issue No.35
2010/03/29

Issue No.35

     March 25, 2010

On RMB Exchange Rate

I. China pursues a managed floating exchange rate regime

China has pursued the basic objective of a managed floating exchange rate regime in the course of reform and opening-up and as it moves from the traditional planned economy to the socialist market economy. It initiated establishment of of a market-based, managed floating exchange rate regime as early as in 1993, and started implementing a unified, managed floating exchange rate regime in 1994. The regime was further improved through the exchange rate formation mechanism reform in 2005, and a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies was instituted. The evolution of China’s floating exchange rate regime has been determined by changes in both domestic and external economic environments. The Chinese government has steadily improved the exchange rate formation mechanism in light of its implementation, and has kept the RMB exchange rate basically stable at an appropriate and balanced level. Between July 2005 when the exchange rate reform started and the end of February 2010, the RMB appreciated by 21.2% against the US dollar and 8.2% against the euro in cumulative terms. Between July 2005 and the end of January 2010, RMB’s nominal effective exchange rate and real effective exchange rate increased by 13.2% and 16.4% respectively.

II. The basic stability of the RMB exchange rate amidst the outbreak and spread of the international financial crisis contributed significantly to world economic recovery

      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. Yet, similar to what had happened during the Asian financial crisis, the RMB did not devalue between July 2008 and February 2009 as the financial crisis erupted and continued to spread and the world economy was mired in trouble. China kept the value of the RMB basically stable, with its real effective exchange rate rising by 14.5%. During this period, 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.

      The following figures also deserve noting: In 2009, China’s total trade volume declined by 13.9%. Chinese statistics of export to China by 37 countries showed that nearly half of those countries had positive growth in their export to China. Export to China from Australia, South Africa, Brazil and Turkey maintained double-digit growth. Though the United States exported 17% less to the rest of the world last year, its export to China only fell by a slight 0.22%. And 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. Last year, Germany’s export to China hit a record high of 0?/span>76 billion. In addition to being a major export market for neighboring countries like Japan and the ROK, China was also an important export market for Europe and the United States and, as such, has played a positive role in promoting the economic recovery of Europe and the United States.

III. The causes of global economic imbalances are manifold and complex, and the responsibility of addressing such imbalances should not be put on China’s foreign trade alone

Major manifestations of imbalances in the global economy 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. It is the developing countries that have suffered the most in the financial crisis. The causes of imbalances in the global economy are manifold and complex. It is not possible for China alone to shoulder the responsibility for addressing such imbalances. To address these imbalances, countries need to act in a coordinated way, especially with regard to their macroeconomic policies. Countries need to secure the good momentum in economic recovery and at the same time further reform the financial system. On the trade issue, China stands for free trade. Free trade not only keeps the economy going like flowing water. It also brings peace and wellbeing to the people. China calls for consultation on an equal footing to find a win-win or all-win solution. We hope that Europe and the United States will recognize China’s market economy status and lift restrictions on high tech exports to China as it helps address trade imbalance. We understand that the United States and other countries want to increase their exports. Yet this cannot be done by taking political moves such as depreciating one’s own currency and asking other countries to appreciate theirs.

IV. Trade surplus should not be cited as a reason to call for RMB appreciation

First, it is proved in both theory and practice that appreciation of a country’s currency has only limited impact on trade imbalance. China has a surplus in its trade with some developed countries. At the same time, its trade with the ROK, Japan and some developing countries is in deficit. Therefore, trade surplus is the result of globalization and has nothing to do with the RMB exchange rate. The United States pressed for continuous appreciation of the Japanese yen in the 1980s, which threw the Japanese economy into recession. However, the US trade balance did not improve. It even got worse for some of the years that followed. 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%. In the first two months of this year, while the RMB exchange rate was basically stable, China’s trade surplus dropped further by 50.2% compared with the same period of 2009. Together, 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.

      Second, the process of China’s economic development has been one of sharing benefits through international division of labor. China is a link in the international value chain. China’s import of raw materials has stimulated growth of related sectors in countries concerned. China’s import of large amounts of intermediate products has contributed to trade surplus in neighboring countries and regions. And China’s import of capital goods, luxury products and services has created numerous job opportunities for developed countries. Besides, China has shared development space and conducted cooperation with others through processing trade, cross-border investment and so on.

      Third, to politicize the exchange rate issue will not solve trade problems. 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 should not ask others to raise the value of their currencies in order to boost US export. China has taken active measures to expand domestic demand, and these measures have produced notable results. Blaming things on exchange rate does not solve the problem. 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.

      Fourth, a country’s exchange rate formation mechanism is determined by its economic conditions. And change in exchange rate is a result of combining all economic factors involved. Despite signs of stabilization, uncertainties remain in the global economy and what is to come is not very clear. The foundation for China’s economic rebound is not yet sound. We have seen major fluctuations in the exchange rates between the world’s major currencies, and hope to see the exchange rates remain basically stable, 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 a managed floating exchange rate regime based on market supply and demand. 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.

This newsletter is issued by the Mission of the People’s Republic of China to the European Union, Boulevard de la Woluwe 100, 1200 Brussels, Tel + 32 2772 95 72, www.chinamission.be/eng/.  Any comments or queries on the contents can be addressed to chinamission_eupress@mfa.gov.cn.

76 billion. In addition to being a major export market for neighboring countries like Japan and the ROK, China was also an important export market for Europe and the United States and, as such, has played a positive role in promoting the economic recovery of Europe and the United States.

 

III. The causes of global economic imbalances are manifold and complex, and the responsibility of addressing such imbalances should not be put on China’s foreign trade alone

Major manifestations of imbalances in the global economy 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. It is the developing countries that have suffered the most in the financial crisis. The causes of imbalances in the global economy are manifold and complex. It is not possible for China alone to shoulder the responsibility for addressing such imbalances. To address these imbalances, countries need to act in a coordinated way, especially with regard to their macroeconomic policies. Countries need to secure the good momentum in economic recovery and at the same time further reform the financial system. On the trade issue, China stands for free trade. Free trade not only keeps the economy going like flowing water. It also brings peace and wellbeing to the people. China calls for consultation on an equal footing to find a win-win or all-win solution. We hope that Europe and the United States will recognize China’s market economy status and lift restrictions on high tech exports to China as it helps address trade imbalance. We understand that the United States and other countries want to increase their exports. Yet this cannot be done by taking political moves such as depreciating one’s own currency and asking other countries to appreciate theirs.

IV. Trade surplus should not be cited as a reason to call for RMB appreciation

First, it is proved in both theory and practice that appreciation of a country’s currency has only limited impact on trade imbalance. China has a surplus in its trade with some developed countries. At the same time, its trade with the ROK, Japan and some developing countries is in deficit. Therefore, trade surplus is the result of globalization and has nothing to do with the RMB exchange rate. The United States pressed for continuous appreciation of the Japanese yen in the 1980s, which threw the Japanese economy into recession. However, the US trade balance did not improve. It even got worse for some of the years that followed. 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%. In the first two months of this year, while the RMB exchange rate was basically stable, China’s trade surplus dropped further by 50.2% compared with the same period of 2009. Together, 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.

      Second, the process of China’s economic development has been one of sharing benefits through international division of labor. China is a link in the international value chain. China’s import of raw materials has stimulated growth of related sectors in countries concerned. China’s import of large amounts of intermediate products has contributed to trade surplus in neighboring countries and regions. And China’s import of capital goods, luxury products and services has created numerous job opportunities for developed countries. Besides, China has shared development space and conducted cooperation with others through processing trade, cross-border investment and so on.

      Third, to politicize the exchange rate issue will not solve trade problems. 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 should not ask others to raise the value of their currencies in order to boost US export. China has taken active measures to expand domestic demand, and these measures have produced notable results. Blaming things on exchange rate does not solve the problem. 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.

      Fourth, a country’s exchange rate formation mechanism is determined by its economic conditions. And change in exchange rate is a result of combining all economic factors involved. Despite signs of stabilization, uncertainties remain in the global economy and what is to come is not very clear. The foundation for China’s economic rebound is not yet sound. We have seen major fluctuations in the exchange rates between the world’s major currencies, and hope to see the exchange rates remain basically stable, 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 a managed floating exchange rate regime based on market supply and demand. 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.

This newsletter is issued by the Mission of the People’s Republic of China to the European Union, Boulevard de la Woluwe 100, 1200 Brussels, Tel + 32 2772 95 72, www.chinamission.be/eng/.  Any comments or queries on the contents can be addressed to chinamission_eupress@mfa.gov.cn.

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