Implications of RMB depreciation
- By Lan Xinzhen
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E-mail Beijing Review, October 25, 2016
As the exchange rate quotation showed on October 18, the central parity rate of the yuan against the U.S. dollar stood at 6.7303, a six-year low, and implied a depreciation of 10 percent over the past one year or so, considering the parity rate of 6.1162 on August 10, 2015.
On October 1, the Chinese currency formally joined the International Monetary Fund's special drawing rights (SDR) basket. Before the move, there were concerns that being added to the basket of IMF reserve currencies would trigger a sharp appreciation of the yuan. The reality is, however, going against expectations. The yuan, instead of scrambling out of its downward tendency since last August, is depreciating more sharply.
Is this a result of the Chinese Government manipulating its currency? Definitely not. Since the exchange rate reform conducted in 2005, the yuan has gradually adopted a market-oriented, freely floating exchange rate mechanism. One of the reasons for the yuan being included into the SDR basket was the marketization of its exchange rate.
China's central bank also stated that the yuan's depreciation is a market result. Even the U.S. Government, which had long accused the Chinese authorities of devaluing its currency, also admitted that this round of RMB depreciation was caused by market forces. This was noted in a semiannual report submitted by the U.S. Treasury Department to the House of Representatives on October 15, which opted against declaring China a currency manipulator, instead asserting that Beijing had "substantially reduced" its market intervention.
RMB depreciation should be good news for the country's exports, which have played a big role in China's soaring economic growth over the past three decades. The nation was showering the world with products made in China, valued at billions of yuan, but that was before the 2008 global financial crisis. In the aftermath of the financial turmoil, demands from the international market shrank tremendously, which led to a cliff-like drop in Chinese exports and even negative growth rates.
Today, Chinese exports are still trapped in a plight. Customs statistics show that in the first three quarters of this year, China's exports were registered at 10.06 trillion yuan ($1.5 trillion), a drop of 1.6 percent from the same period last year. RMB depreciation has not propped up Chinese export growth, and this sector is still playing a minimal role in boosting the national economy.
Statistics from the National Bureau of Statistics suggest the best tools to shore up the country's economy are consumption, followed by investment. Imported commodities keep rising. Agricultural products such as wheat, rice, corns, soybeans and meat, as well as bulk stock like iron ore, crude oil and bronze form the majority of imported goods.
Statistics from the General Administration of Customs show that in the first half of this year, imports of rice, wheat and corn jumped by 22 percent over the same period last year, hitting a new 15-year high. On October 14, dozens of Chinese businesses signed contracts worth $2.1 billion with American businesses in the U.S. state of Iowa, with China's total imports of farm produce hitting 5.1 million tons. This news implies an increase in China's imports of agricultural products.
Customs statistics also reveal a 9.1-percent increase in iron ore imports, 14 percent in crude oil, 15.2 percent in coal, and 11.8 percent in bronze in the first three quarters of this year, compared with the same period last year.
The depreciation of the yuan has forced China to pay more for these goods compared with last year. RMB depreciation has also triggered concerns in the capital market, which might spur capital flight to avoid the risk of shrinking wealth.
A report released by Standard Chartered Bank in late September asserts that the expectation of RMB depreciation continues to encourage capital outflows. The first eight months or so of this year saw outflows of $420 billion in non-direct investment. Now, many market entities take a wait-and-see attitude toward this round of RMB depreciation; however, such views may strengthen depreciation expectations.
Looming inflation and capital outflows do not bode well for the Chinese economy. If China turns a blind eye to RMB depreciation, it would have grave consequences on the Chinese economy and the world's as a whole.
When the role of exports in promoting economic growth is diminishing, it's necessary for the Chinese Government to stabilize its currency's exchange rate through market means, so as to avert continuous depreciation. A stable exchange rate at this time favors the Chinese economy more than either currency appreciation or depreciation.
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