RMB Exchange Rate, the Unavoidable Pothole in the Road

This week, discussions about the RMB again caught the attention of people around the world, and the exchange rates issue is once again being put to the test. The RMB exchange rate not only involves China’s sovereignty and economy but also influences the global economy. Early this morning, the Nuclear Security Summit in Washington, D.C. theoretically involved discussions on global nuclear security, but in reality, discussion about the RMB exchange rate was hard to avoid. President Hu Jintao emphasized again that the RMB will not appreciate under pressure from other countries.

Previously, talks about whether the RMB would appreciate were hot topics of debate between China and the United States. The U.S. government attributes the U.S.-China trade imbalance and domestic employment problems to the undervaluation of the RMB. In addition to the U.S. government’s repeated pressure for substantial appreciation of the RMB, many members of the U.S. Congress have come together to request that China be labeled a so-called currency manipulator. The RMB has certainly become an important factor influencing U.S.-China relations. The Chinese government has been very clear about its stance regarding this matter: The RMB is not undervalued. Simply appreciating the RMB will not solve the U.S.-China trade imbalance or U.S. employment problems. Instead, maintaining the stability of the RMB exchange rate is crucial.

It should be noted that last Saturday, the March report on China’s imports and exports showed a $7.24 billion trade deficit, ending China’s 70-week trade surplus since May 2004. In the first quarter of this year, China’s trade surplus is 80 percent less than last year’s first quarter. After a war of words and rebuttals between the U.S. and China, the debate about the RMB exchange rate has become increasingly heated as the U.S. postpones the announcement of its exchange rate policies and as China incurs its first trade deficit in six years.

What type of exchange rate policy China should ultimately enact has not only caught the attention of the U.S. and the E.U., but has also stirred some in-depth discussion among domestic and foreign experts and scholars. The focus has been on whether the RMB should appreciate and whether it should occur all at once or in gradual steps. These questions also generated heated debate among experts, scholars and financial leaders at the recently concluded Boao Forum for Asia.

Over a three-day period, Sina’s finance section conducted a survey among Boao participants, revealing that 80 percent of the respondents believed that the RMB will appreciate. One question was, “Should the RMB appreciate in the next six months? And should this occur all at once or in gradual steps?” Out of 20 people, 16 of them, or 80 percent of the respondents, stated that they believed the RMB should appreciate gradually. These respondents included Li Zhiqiang, president of Qinghua Ziguang; Xiang Bing, dean of the Cheung Kong Graduate School of Business; Wang Boming, president of China’s Stock Exchange Executive Council; and Min Yida, president of Dell’s Greater China Region, among others.

Actually, since the beginning of this year, China’s Ministry of Commerce and Ministry of Industry and Information Technology have conducted RMB “stress tests” on labor-intensive industries, including regions such as the Pearl River Delta and the Yangtze Delta. Those outside China have interpreted this wide-scale stress test as a sign that China has already stepped up its preparations for the RMB appreciation.

Since last week, foreign exchange markets have seen a sustained seven-day increase in the central parity of the RMB against the U.S. dollar, reaching a 10-month high. Not only has the price of gold and crude oil steadily increased, but futures in overseas bulk commodity markets have also continued to rise. The price of the U.S. dollar against the RMB has continued to decrease in the past few days in overseas non-deliverable forward (NDF) markets, reflecting that overseas markets are once again expecting the RMB to appreciate. In the past week, the Hong Kong, Shanghai and Shenzhen stock exchanges have seen continued, large-scale increases in the stock prices of companies, such as airline and paper companies, which could benefit from an RMB appreciation. This also indicates that the RMB will slowly appreciate in the future.

All of this indicates that the RMB exchange rate not only affects governments but also foreign investment markets. The issue of the RMB is hard to get around. In the next half-year, RMB appreciation is already a high probability event. Although the extent and time frame of the appreciation is not yet clear, all circles seem to have already reached a consensus.