China Rejects US Pressure on RMB Appreciation

The US cabinet once again started the battle with China for the Renminbi (RMB) appreciation, but this time they encountered fierce counter-strike from China.

Here came out the disputes about RMB exchange again! Some western countries’ scholars, leaders and senators blamed China for “intentionally” lowering the RMB value to stimulate the export. Some of them even put forward the theory of “RMB’s threat to global economy”.

On March 16, Chinese Ministry of Commerce’s spokesman Yao Jian pointed out in a press release that it is unreasonable and meaningless to blame the RMB exchange rate for trade surplus of China in Sino-US trade.

Trade Surplus Not the Reason for Appreciation

According to the report, 130 US representatives jointly wrote to US Treasury secretary Tim Geithner and Commerce chief Gary Locke, requiring the US government to “use every method to force China to end the control of currency exchange rate and stop stimulating the export through undervalued RMB”. These representatives appealed in the letter that the anti-subsidy tariffs should be imposed on the goods imported from China and they urged the White House to place China into the list of “the countries that manipulate exchange rate” when issuing the “Half-year Exchange Rate Report” in April.

Yao Jian criticized these representatives’ opinions and said: “Trade surplus is not the reason to force the RMB to appreciate.”

Yao Jian said that it is not right to rebuke RMB exchange rate for the stagnant recovery of US economy. “We wish that the USA should be an advocator for free trade instead of an obstructer when it is negating the influence of financial crisis and resuming its economy. It is egoism with respect of one’s own interest instead of the others.” said Yao Jian.

Yao also added that China will import more goods from different countries and take measures to enlarge its domestic demand.

The experts believed that using political ways to solve the problem of exchange rate is of no help to fight against financial crisis for both China and the USA.

Misreading of “Undervalued RMB”

Jim O’Neal, chief economist of Goldman Sachs, said that the exchange rate of RMB against the US dollar is “not so undervalued” based on Goldman Sachs’ currency estimation model.

O’Neal pointed out that the westerners “traditionally” had two misunderstandings of RMB’s exchange rate. Firstly, RMB was once indeed undervalued according to the currency estimation model. However, things have already changed by now. It is not deniable that the RMB has already appreciated by 20% since the exchange rate reform. Secondly, more and more proofs showed that China’s trade pattern has undergone significant changes since the outbreak of financial crisis. Concretely speaking, the imports of China increased at a faster pace than its exports. “Some Chinese government officials also hinted that trade deficit is likely to occur to China.”

According to the latest statistical data, China’s exports in February increased by 45.7% from last year while its imports saw a 44.7% year-on-year increase. China’s trade surplus kept narrowing since last October. In February 2010 the amount decreased to 7.6 billion US dollars from last October’s 20 billion US dollars. According to the Ministry of Commerce, the imports of China will keep increasing at a fast pace in the first half of 2010; the trade surplus will further narrow and the monthly trade deficit is likely to happen.

Appreciation no Solution to Economic Problems

Some people claimed that the emerging economies are the “victims” of RMB exchange rate policy. But HSBC’s chief economist Stephen King held the opposite opinion. He said that the enlargement of China’s demand is an important factor for the recovery of those emerging economies after the crisis.

IMF chief economist Olivia Blanchard said that the appreciation of RMB is not a solution to the economic problems. Even though the RMB and the other main currencies in Asia appreciated by 20%, it could only help the US exports increase by the amount equivalent to 1% of the US GDP.

“I don’t think we should blame China for its exchange rate policy. It is very important,” said Blanchard. “What China should do, as it is doing, is to decrease the interest rate to stimulate the domestic demand.”

Some analysts noticed that the developed countries may boost trade protectionism towards China when China’s economy is gradually recovering compared with their stagnant, which mean that more and more trade disputes will happen between China and developed countries. They thought that this will be harmful to both sides.

Some experts suggested that China should adjust the exchange rate policy as quickly as possible if necessary. According to O’Neal, RMB may be allowed to be used in a wider region in the future and the trade-weighted flotation management system will be needed.

But some experts believed that China would postpone its actions in changing exchange rate. Wang Zhihao, research executive of Standard Chartered for China, thought that RMB might appreciate by 2% by the end of 2010. But the appreciation will not be done in one step; instead, it will go on gradually. Peng Wensheng, researcher from Barclays, thought that the short-term changes to RMB exchange rate, if any, will happen before this year’s G20 summits, which will be held in April and October. In his opinion, RMB will appreciate by 5% each year in the future.