China’s monetary Renminbi (RMB), after long-term appreciation, suddenly made a turn. The experts made many guesses about the reasons of the depreciation.

As of the end of 2008, the appreciation trend of the RMB took a sudden turn. On December 1, 2008, the exchange rate of the RMB against the US dollar was 6.8505 yuan to one US dollar, down by 156 bench points. This was the largest decrease after the exchange reform in July 2005. Since that day, the spot rate had reached the decline limit for 4 straight days, which was the first time after the exchange reform.

Till December 4 on which the Fifth Sino-US Strategic Economic Dialogue was held in Beijing, the spot rate fell to RMB 6.8845 yuan to one US dollar. The banks in China began to limit the sale of the US dollar currencies. The annual RMB Non-delivered Forward (NDF) exchange rate in the offshore market fluctuated between 7.2400 yuan and 7.2800 yuan. That means the market anticipates that the exchange will fall to 7.24 yuan to one US dollar one year later.

Many experts think the depreciation of RMB can release the export-oriented enterprises in China from the pressure of the slump in export during the financial crisis. The “most possible” explanation to the depreciation is to stimulate the economic growth. However, there are two opposite viewpoints about whether the depreciation of RMB should be continued.

On December 5, the straight declines to the limit of RMB’s exchange rate finally came to an end. Till December 15, the exchange rate of the RMB against the US dollar was 6.8442 yuan per dollar and it was the fifth straight day on which the RMB appreciated. However, the foreign exchange dealers still hold cautious attitudes toward the trend of RMB. It is forecasted that the deprecation trend of the RMB is inevitable and it may last till the first half of 2009.

Strategy Lead by China’s Central Government?

There are two supposed reasons for the sudden depreciation of RMB: the market power and the government intervention.

The experts attributing the depreciation to the market power think that the production and consumption in China took the downhill trend in the second half of 2008. The Purchasing Manager Index issued on December 1 shows the bleak outlook of the manufacturing industry which takes over a half of China’s economy. The worries about China’s future economic growth resulted in the slump of RMB’s exchange rate on that day.

Secondly, the lasting unilateral appreciation of RMB and the oversized appreciation in a short time should be modified. Since the exchange reform 3 years ago, the exchange rate of Renminbi against the US dollar has increased by 17.5%. The lasting unilateral appreciation or depreciation of a currency is accumulation of risk. After August 2008, although the exchange rate between the RMB and the US dollar kept stable, passive appreciation still occurred to RMB because of free floating exchange system.

Thirdly, since September 2008 the People’s Bank of China (PBC) has already cut the interest rate for 5 times, of which the decrease extent on November 26 reached 108 bench points, increasing RMB’s pressure of appreciation.

In the press release of the Fifth Sino-US Strategic Economic Dialogue, Chen Deming, Minister of Commerce of the PRC attributed the depreciation to the market power and said that China would not promote its export through the depreciation of RMB.

Some people think that the depreciation of RMB can not be only attributed to the market power. The Hong Kong-based China News Agency released an article, saying that the decrease of RMB’s exchange to the decline limit for 4 straight days is an apparent signal for the depreciation of RMB from China’s central government.

The depreciation of RMB has been in fermentation for long. On November 11, 2008, Director of the PBC Zhou Xiaochuan said when attending a conference in Brazil: “We can not exclude the possibility of promoting the export through the depreciation of RMB.” On November 17, the PBC’s quarterly Report on Monetary Policy for the first time didn’t mention the problems of the stability of RMB and the controllable exchange rate. The implications of the steady appreciation of RMB could be found in the 13 reports before the exchange reform. Chinese president Hu Jintao warned on November 30 that the global financial crisis was impairing China’s competitive advantages in foreign trade. The trade protectionism might arise in some countries with the deepening of the financial crisis, which could cause damages to China’s economy. On December 2, the State Administration of Foreign Exchange (SAFE) and State Administration of Taxation (SAT) jointly published a note to further regulate the requirements of foreign payments and submission of taxation proofs. It was considered as a willing to enhance the monitoring to prevent the large-scale evacuation of international hot money from Mainland China. On December 3, the standing conference of China’s State Council mentioned: “We should make use of reserve requirement, interest rate and exchange rate to maintain the adequate supply of flow cash and the stable increase the money credit.

The Hong Kong-based Oriental Daily commented that the exchange rate of the RMB has both the economic and political meaning. The sudden depreciation of RMB may be the intentionally led by China’s central government. The aim is to warn the USA of the speculation in fighting financial crisis and trade protectionism against China, as well as to increase the export of “Made in China” to avoid the storm of enterprises’ bankruptcies.

For China, stability is the most important. The drastic shrink of the American and European markets and the appreciation of RMB brought great damages to China. In the past two months, a large amount of export-oriented enterprises in the Pearl River Delta Areas and Yangtze River Delta Areas suffered deficit or even bankruptcies. The enterprises bankruptcies and jobless employees can bring about great challenges to the social stability. Making the RMB depreciate to stimulate the economic growth seems to be a good way to solve that problem.

Appreciation V.S Depreciation

People hold two opposite viewpoints towards the problem that the depreciation of RMB should be continued or not. Gu Yongding, former adviser of the PBC’s Monetary Policy Committee, said that China should not be happy to see the depreciation of RMB. Gu expressed that the government was planning to stimulate the economy by increasing the domestic demand instead of export. At this time, there are still large trade surplus and capital account surplus, so it is not proper to increase the export by depreciating RMB.

Xu Gang, board manager of CITIC Securities thinks that the depreciation is a rational choice. According to him, if the exchange rate is too high, the cost advantages of China’s export will be replaced by other emerging countries very soon. “That means we protect other developing countries’ employment at the cost of higher unemployment ratio in our country,” said Xu.

Xu also thinks that the status quo of the world economic and political situation makes the depreciation of RMB necessary. In the past four months, the US dollar has appreciated nearly by 20% and it is forecasted that in 2009 this trend will be continued. In consideration of the 40-percent proportion of the US dollar in the currencies that RMB is pegged to, the exchange rate of the RMB against the US dollar should have fallen by 10% at the end of 2009 in order to maintain the relative place of RMB in the global monetary system. Besides, the new US government led by Obama will be in governance in January 2009. Before this, the international stress for the exchange rate of RMB may be just like a blind man’s bluff. China should make good use of this period.

In Xu’s opinion, from the long-term view, China should accelerate the formation of the marketization pricing system of RMB so that the appreciation or depreciation of RMB is decided by the market power instead of the government decisions. This is helpful for the development of China’s financial market as well avoidance of the international political stress.

Frank Gong, chief economist of JP Morgan holds a different opinion with Xu Gang. He considers the depreciation of RMB as harm to both China and the world.

Firstly, the increased price resulted from the appreciation of RMB is not a main factor to the difficulties of China’s export. The main reason is the inadequate foreign demand caused by the economic recession in the western countries. The depreciation of RMB can not change the actuality of China’s export.

Secondly, if the depreciation expectation of RMB is formed at present, the international hot money entering China in these years may escape; what’s worse is that the domestic capital may flee out. If large-scale capital flight happens, the possible deflation will blow China’s stock and property markets seriously.

Thirdly, the depreciation of RMB may trigger trade conflict. When Obama becomes the US president in January 20, 2009, one of his primary international economic problems is the trade problem with China. The Democratic Party controls the parliament and may impose trade sanctions on China, especially when China’s trade surplus with the USA is enlarging.

Fourthly, the status quo of China’s export is still better than the one of S. Korea, Singapore and other Asian countries and regions. The depreciation of RMB may trigger another round of competitive currency depreciation in Asia. The depreciation extent of the S. Korean won and the Singapore dollar can’t be lighter than RMB. The result is that all the countries depreciate their currencies intentionally without the effect of stimulating the economy. The problems are worse.

So, Frank Gong believes that the deprecation of RMB is harmful or even “dangerous” to China
and other countries. In his opinion, only the small-scale appreciation of RMB can help with the stability of the world economy.