RMB Reform: Flexible, Yet True to Form

RMB Reform: Flexible, Yet True to Form

Signs of a stable recovery are becoming more noticeable in China, especially after the People’s Bank of China, the central bank, decided to proceed with efforts to reform the renminbi (yuan) exchange rate regime and improve the currency’s fexibility. Several experts recently shared their views on the reform’s principle, content and infuence on Chinese exporters and the economy with Xinhua News Agency. Edited excerpts follow:

Perfect time

Li Daokui, professor at Tsinghua University and adviser to the Monetary Policy Committee of the People’s Bank of China: China’s exchange rate policies are back to normal as the country proceeds with the renminbi exchange rate regime reform—a signal of the end to the country’s exchange rate policies designed to cope with the fnancial crisis.

The renminbi exchange rate remained basically stable through the worst of the crisis, while a number of other major sovereign currencies depreciated against the U.S. dollar. This is the most important contribution China made to the global economic recovery. Major countries around the world praised China for its exchange rate policies during the crisis.

Now—with China’s economic recovery gaining ground and picking up along the route of a V-shaped recovery—is the right time for China to further reform the exchange rate regime. Domestically, China has prioritized the transformation of the nation’s economic development pattern and economic structure adjustment. Globally, the world economy is standing up. Even with the sovereign debt crisis in Europe, the chances of a second dip are almost non-existent.

Against this backdrop, the timing could not be more perfect for China to get its exchange rate policy back on track and push forward the reform of exchange rate regime.

Ding Zhijie, professor at the University of International Business and Economics: Maintaining comparative stability of the renminbi exchange rate is a short-term counter-crisis measure, although in doing so the Chinese Government has played an important role in the world’s fght against the impacts from the crisis. Changes in economic situations at home and abroad have formed external conditions for further reforms of the renminbi exchange rate regime.

Bi-directional floating

Li Daokui: The renminbi (yuan) exchange rate will follow a bi-directional floating pattern—appreciation and depreciation are all possible against major currencies—for more fexibility. If the euro depreciates further against the U.S. dollar or the U.S. dollar appreciates against other currencies, the yuan might depreciate moderately against the U.S. dollar, with reference to a basket of currencies. The yuan will not necessarily appreciate by great margins against the U.S. dollar. Even if the yuan appreciates, past experience tells us the appreciation will be kept within reasonable and acceptable limits to ensure appreciation in a gradual and controllable manner.

DOUBLE-EDGED SWORD: A pattern cutter in a garment factory in Jiaxing, Zhejiang Province, works on a new design. Experts think the renminbi exchange rate reform will create difficulties for some exporters in the short run, but will ultimately help spur exporters to upgrade their production capabilities

Meanwhile, the basis for large fluctuations of the renminbi exchange rate, especially greater appreciation against the U.S. dollar, does not exist.The country’s trade surplus has decreased in recent years and current account surplus accounts for a declining percentage of GDP, from 9.9 percent in 2008 to 5.8 percent in 2009. Economic statistics from the first five months indicate the percentage could dropto around 2 percent this year. In these circumstances, the yuan may not fluctuate substantially, particularly in terms of appreciation this year. But whether the euro deteriorates or not could become a key factor influencing large fluctuations of the renminbi exchange rate.

Gains and losses

Ba Shusong, Deputy Director of the Institute of Financial Studies under the Development Research Center of the State Council: Continuing the exchange rate reform in China against the background of economic globalization will beneft China’s economic development, while a number of other factors are considered.

It will guarantee the country’s interests during its integration into the global economy and a favorable external environment for Chinese exporters and even the Chinese economy as a whole. It will also help exporters take the initiative to adjust production to catch up with changes in the country’s economic growth pattern. Companies will be more affected by demand rather than the exchange rate and will be capable of voluntary adjustments.

Many were pessimistic about the prospects of exporters’ survival when the exchange rate regime reform kicked off in 2005, but to their surprise, Chinese exporters have continued to grow through adjusting production and streamlining management.

Li Daokui: Any reform is double-edged. The bi-directional foating of the renminbi is conducive to relieving imported infationary pressures and spurring exporters to update production capabilities, but, in the short run, the exchange rate regime reform will create difficulties for some exporters. The ongoing reform starting in 2005 didn’t result in signifcant losses to the economy, even with an accumulated appreciation of the yuan exceeding 20 percent. We have every reason to believe the Chinese economy will have more gains than losses from the reform to achieve economic structure optimization and growth pattern transition.

The reform provides opportunities for exporters to expand their businesses too, as prices of imports are likely to decrease. (Since large quantities of imported products are raw materials, price decreases of these imports will help reduce production costs.)

Exporters should also make use of the challenges posed by the reform to increase their products’ added value and their proftability. The reform will have no significant impact on exporters, but export-oriented manufacturers have to use foresight, and prepare for future challenges by optimizing their business portfolio, and improving their management and technology capacity.