Thanks Yiwu, I am going to post the full text.
It makes sense to me.
Mish
Why is the appreciation of Renminbi suspended?
Last Updated(Beijing Time):2004-10-18 17:04
The topic on the appreciation of Renminbi has been actually talked about for more than two years now. The recent rise of the topic can be ascribed to changes in the international economic and political situation and remarks made by Zhou Xiaochuan, governor of the People's Bank of China during the National Day holiday that improving the Renminbi exchange rate forming mechanism means "greater flexibility". The remarks sparkle imaginations for people in the market.
Recently China's State Administration of Foreign Exchange dispelled rumors about the appreciation of Renminbi, denying speculation that the currency would be revalued in the near future once again. So why does China stick to its ground and not let its currency appreciate?
Now China's macroeconomic control is in a critical stage, and prominent contradictions and problems in economic operation have not been completely resolved yet. At this juncture, it is essential to keep stable, continuous and balanced pace in economic development, instead of taking stimulating measures.
According to Li Yang, Director of the Institute of Finance and Banking of Chinese Academy of Social Sciences, as a financial factor exchange rate should subject to the real economy. At present, the Chinese economy is in a complicated and confusing state. Questions like whether inflation factors will stay, how long they can last and what China's future economic situation will be like need further studies. Only on the basis of study can judgment about the future trend of economic situation be made. He predicts that in the next month complete judgment may not necessarily be available.
On the other hand, China's money supply has been on the decrease for four consecutive months. Will it produce adverse impact on the economic operation in the second half of this year and next year? And to which extent will the hike in oil price affect the Chinese economy? To answer all these questions, we need observation. Therefore, for the sake of prudence, it is ill-advised to increase new unstable factors in the market.
Li argues that the adjustment of exchange rate, especially exchange parity, will cause chain reactions. For instance, there will be impact on imports and exports, as well as the reevaluation of the value of foreign currency assets held by import and export enterprises. Therefore, at present, it is not an urgent task for China to tune its exchange rate. Rather, it should exercise caution in light of the domestic economic situation.
There are also many uncertainties in the international situation. For example, the U.S. and Japanese experienced slowdown of consumption or negative growth of investment in the second quarter this year, and the international oil price keeps shooting up. According to Tan Yaling, a research fellow with the Research institute of International Finance at Bank of China, under such external environment, China should be even more cautious about the appreciation of Renminbi.
Apparently, developed countries in the West hope to shift their domestic contradictions through Renminbi appreciation. However, as China is a developing country, Renminbi is not internationalized yet. Thus, no one can count on an appreciated Renminbi to resolve contradictions in the economic structure of developed countries or reverse their trade deficit. Indeed, it is an embodiment of the unfairness in the international monetary system and economic system. There are similar historical lessons.
For this reason, Tan argues that given the current domestic and international economic situation, China is still in the stage of observation, waiting and breaking-in on the exchange rate issue; conditions are not ripe for tuning the exchange rate yet. At present, apart from petroleum and gold speculations, many international speculations put their stake on Renminbi. If China raises the value of its currency at this juncture, it will further stimulate international speculation. Furthermore, the adjustment of exchange rate will produce adverse effect on the continuity of China's market reform and that of the economy. Foreign-invested enterprises contribute more than 60 percent of China's trade. The appreciation of Renminbi will drive these enterprises and funds out, which will hurt China's foreign trade.
Apart from factors in the domestic and international economic situation, another reason why Renminbi should not be appreciated for the time being is that supporting work for the reform of China's exchange rate regime is not completed yet, and thus the domestic environment does not support a more flexible exchange rate regime now.
Zhou Xiaochuan, governor of the People's Bank of China, recently pointed out several reforms to be carried out for improving the Renminbi exchange rate forming mechanism. He even mentioned the reform of state-owned banks. At first glance, it seems to be irrelevant to the reform of exchange rate. In fact, however, it is the foundation of the reform in the respect of micro mechanism. Whether these financial entities are well prepared for fluctuations in the exchange rate and provide rational response is very important. As matters stand, China is not ready in the respect of the reform of commercial banks. Meanwhile, homework remains to be done in many aspects, like loosening the regulation of capital accounts, opening-up of the capital markets and infrastructure of the financial markets. Conditions are not ripe for leaving the exchange rate forming mechanism to market forces. Therefore, China cannot afford to raise the value of its currency rashly.
Therefore, at a time when exchange market, economic entities and macroeconomic control factors are still immature, it is risky for China to modify the exchange rate of Reminbi indiscreetly.
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