A Stable Yuan Contributes to the Global Economic Recovery

Chinese Vice Premier Li Keqiang addressed concerns over the exchange rate of the Chinese currency while meeting with the world's leading entrepreneurs in Davos, Switzerland, in January. He reaffirmed China's efforts to "keep the yuan's exchange rate stable at a reasonable and balanced level" are contributing to the world economy. Entrepreneurs present all assented to his statement. The meeting also evidenced a new round of heated discussions about the yuan's exchange rate is underway in some Western countries.

Fang Ming (a senior analyst with the Department of Financial Markets of the Bank of China): From July 21, 2005 when the Chinese Government initiated a reform of the renminbi exchange rate regime to January 2010, the yuan appreciated 21.2 percent against the dollar and 4.6 percent against the euro. The U.S. Federal Reserve says the same period saw the dollar's broad index drop 8.7 percent and its major currencies index fall 12.5 percent. This data shows while the yuan appreciated by a considerably large margin, the dollar only depreciated.

From February 2007 when the sub-prime mortgage crisis broke out in the United States to January 2010, says the Bank for International Settlements, the yuan's nominal effective exchange rate and real effective exchange rate jumped 7.6 percent and 10.7 percent respectively. The indexes for the euro rose 9.4 percent and 5.7 percent; the Japanese yen's soared 28.8 percent and 17.4 percent; and the Australian dollar went up 7.1 percent and 8.2 percent while the Canadian dollar rose 8.6 percent and 5.8 percent. The nominal effective exchange rate and real effective exchange rate of the British pound, however, dived 24.2 percent and 23.9 percent respectively, while those of the U.S. dollar dropped 6.8 percent and 8.1 percent. These statistics are also indicative of the yuan's appreciation and the depreciation of the British pound and the U.S. dollar.

By any measure, the yuan has appreciated dramatically while maintaining overall stability. Against this backdrop, it is ridiculous some state leaders and self-proclaimed preeminent scholars still call for its appreciation. At the same time, it should be noted that the appreciation of some developed countries' currencies resulted from the dollar's excessive depreciation. Moreover, as the renminbi exchange rate regime keeps improving, the Chinese Government has allowed the yuan to appreciate in keeping with market rules.

Albert Keidel (a senior fellow at the Washington, D.C.-based Atlantic Council and a renowned expert on Chinese economic affairs): China's trade surpluses do not necessarily mean that the yuan is undervalued. In fact, economists do not have an effective way of judging whether a currency is undervalued. China's surpluses since 2005 stemmed from the excessive consumption of the Americans rather than problems with the yuan's exchange rate.

It is meaningless to look at the percentages the yuan has appreciated against the dollar. That's because China since 2005 has lifted the yuan's peg to the dollar and switched to an exchange rate regime based on the weighed average of a basket of currencies. Under this regime, when the euro appreciates, the yuan should appreciate against the dollar as well. When the euro started to depreciate drastically in June 2008, however, the yuan did not follow the trend of the basket of currencies. Instead, China kept its exchange rate against the dollar stable. That is to say the yuan has appreciated against the dollar by a much larger margin than what was expected under the new renminbi exchange rate regime since June 2008.

Promoting recovery

During the 1997 Asian financial crisis, China narrowed the range for the fluctuations of the yuan's exchange rate to prevent the crisis from becoming entrenched as countries in the region vied to devaluate their currencies. The decision, which effectively helped other Asian nations overcome the crisis, showed China is a responsible world power. Since the outbreak of the global financial crisis in 2008, China has coped with challenges and achieved an economic rebound in a short time. Its strong momentum for growth has contributed greatly to the world's economic recovery.

Fang Ming: Some Western officials and scholars often play up the concept of "purchasing power parity (PPP)." They have argued that $1 should be equivalent to about 3 yuan by PPP. The reason why they came to this conclusion is that they do not have a correct understanding of the relationship between PPP and exchange rates. First, the dollar's PPP serves as the base to calculate other currencies' PPPs. The dollar's PPP conversion rate, as stated by the International Monetary Fund (IMF), is one. If the dollar's PPP changes, those of other currencies should also change. But the PPP conversion rates cannot reflect these changes. Second, for a developed market economy, the exchange rate of its currency against the dollar can sometimes be lower than its currency's PPP conversion rate. But crises may occur if the PPP conversion rates of countries like Japan and Iceland are far lower than their currencies?exchange rates against the dollar. Third, for emerging markets, especially countries that have yet to complete their market-based reforms, risks may rise when the ratio of their currencies?exchange rates against the dollar to their PPP conversion rates falls under two. If the ratio plummets below 1.5, crises are likely to occur, as evidenced by the Asian financial crisis and the devastation South Korea has suffered in the current global financial crisis.

China has maintained stable and rapid economic development despite the global financial crisis. This is a major contribution to the stability of the world economy. On one hand, its policy of encouraging investment and boosting domestic demand as well as its global procurement has helped major countries restore confidence while promoting the stable development of its own economy. On the other hand, China's efforts to keep the yuan appreciating in a certain range while maintaining its overall stability have set up an example for other countries. These efforts will help the world economy emerge from the crisis by preventing countries from engaging in a vicious competition to devaluate their currencies. They are a reminder of the Chinese Government's determination to keep the yuan's exchange rate stable during the Asian financial crisis despite expectations for the currency to depreciate--a decision that helped stabilize the volatile economic situation in Asia.

Wang Zhenquan (founder and President of the Canada-based Xinqiao Group and Xinqiao Capital): Keeping the yuan's exchange rate stable is the best option to ensure a sustainable global economic recovery. A stable yuan can help Chinese companies increase their exports and use more foreign investment, thus contributing to sustainable development of the Chinese economy. It also helps make China a stabilizer and powerhouse of the world economy. Moreover, a stable yuan can help mitigate the uncertainties in international financial markets, stabilize international foreign exchange and capital markets and speed up the recovery of the world economy.

A stronger yuan: Not a solution

Politicians, scholars and media professionals in some Western countries have irresponsibly put the blame for their trade deficits, loss of manufacturing jobs and global economic imbalances on the yuan, which they believe is seriously undervalued. Worse still, some commentators even blamed the yuan for causing the euro to appreciate. Can the yuan's appreciation solve Western countries' economic problems?

Olivier Blanchard (Chief Economist at the IMF): A stronger yuan is not a solution to the economic problems in the United States and elsewhere in the world. IMF estimates show that a 20-percent appreciation of the yuan and other major Asian currencies can at most help the United States achieve an export growth equivalent of 1 percent of its GDP. The reevaluation of Asian countries is helpful to the rest of the world, but it is not a recipe for sustainable economic growth in the United States and other developed countries.

I think it is important that we do not criticize China for its currency policy. What China is now doing is to cut its savings rate to boost domestic demand while reorienting production to meet increased needs at home. Only in this context can a stronger yuan help China better allocate its resources and prevent economic overheating, thus creating benefits for both the country and the rest of the world.

Albert Keidel: A stronger yuan cannot solve global trade imbalances. The main cause of global trade imbalances over past decades is defects in the economic structures of major developed countries. For instance, in addition to Americans?lavish consumption habits, the U.S. Government's lax supervision over the financial industry has given rise to the possibility of debt expansion based on excessive leveraging. North European countries and Japan, on the other hand, are global savers. Instead of increasing imports from developing countries to stimulate global demand, they have tried to maintain huge trade surpluses with the United States. The United States should be responsible for its trade deficits unless it changes its overall growth strategy that relies excessively on household consumption.

None of the problems in the world economy arises from the yuan's exchange rate. There is no reason whatsoever to put the blame for the sluggish world economic recovery on the yuan's exchange rate. China's economic takeoff will have a major influence on the world economy. But its GDP at present is not large enough. The total GDP of the members of the Organization for Economic Cooperation and Development, including the United States, European countries and Japan, is more than six times China's. In this sense, China is unable to serve as an engine for world economic recovery all by itself. However, China's recovery can be an important psychological factor conducive to worldwide economic recovery. A stable yuan is essential to China's economic and political stability. A steadily growing Chinese economy is bound to benefit the world at large. In the long run, the yuan will appreciate as China's labor cost structure improves. But it will be a slow and incremental process.

Wang Zhenquan: As a matter of fact, the yuan's appreciation will do more harm than good to Western countries. A weak yuan, coupled with the Chinese Government's tax rebates for exporters, has contributed to the low inflation, low living costs and affordable lives in Western countries over past decades. As a result, it has also enabled Western governments to cut fiscal deficits and consumers to spend on credit.

Many experts in the West have realized it is wrong to demand China revaluate the yuan. They believe the yuan's unilateral appreciation may harm the interests of U.S. consumers and undermine the recovery of the world economy. A stronger yuan will make Chinese products more expensive, thus dampening U.S. consumers' purchasing power. Given the high unemployment rate in the United States, such a prospect may rein in consumption and could therefore be detrimental to the United States' economic recovery.

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