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Opinion: What if RMB appreciates?
(People's Daily)
Updated: 2004-03-28 09:12

The appreciation of RMB yuan will incur more disadvantages than advantages to the sustainable development of the Chinese economy, nor will it help improve the Japanese and American economies. It will hurt rather than promote the recovery and stable development of the Asian economy. All these give no reason to RMB appreciation, particularly a sharp appreciation at the present moment.

Much talking is swirling around the world on the yuan appreciation these days. Countries like Japan and the US are pressing China hard to adjust its exchange rates to push the yuan value higher. There is a loud voice in the European public opinion that RMB appreciation is the sole solution to the trade deficit of the EU with China, which has reached 20 billion USD.

Why should those developed countries look forward to the yuan appreciation? Yet why should developing countries remain silent to the issue of the exchange rates of the Chinese currency? Professor Lin Huasheng from the Institute of Asia-Pacific Studies of Waseda University expressed his view when he visited Shanghai Academy of Social Sciences recently.

As stated above, his idea is: the yuan appreciation will harm, rather than help, the sustained development of the Chinese economy or the rebound and stable growth of the Asian economy; Japan and US will hardly get any benefit from it in terms of the improvement of their economies.

Motives and purposes of Japan-US imposing pressures

Lin thought Japan and US had very clear-cut motives and purposes in forcing the RMB yuan to appreciate.

First and foremost, they expect to reduce their trade deficit with China through yuan appreciation. Japan and US argued that the only way to shrink their trade deficit with China would be to push the RMB higher so that imports from China could be reduced and the swelling trade deficit with China would be diminished as a result.

Secondly, the two economic powers hope that the yuan appreciation would help ease their domestic inflation pressure.

Thirdly, the RMB appreciation, they believe, would curb the surge of "investing-in-China" by their businesses. Both Corporations of Japan and of the US are investing heavily overseas, which has "hollowed the industries" and upheaved the unemployment in their own countries. In this respect Japan takes a more serious account of it than the US does. The main reason for that is that the US has absorbed sizable Japanese and European capital to fill in its domestic market while making an aggressive investment overseas.

But Japan failed to receive much foreign capital when their businesses marched toward the overseas market, leading to "emptied industries". The problem has been underlined by its highest post-war unemployment rate. That's why Japan is just eager to see a higher-valued RMB to discourage the outflow of its capital to China.

However, the problem is should the Japanese capital not go to China the American's would take its place and likewise if the European's failed to do it the capital of Asian Chinese would enter China in its stead. The result is that investors swarm into China from all over as we've seen now.

Although the American economy appears not bad in all aspects, Lin said, the US just cannot pull down its domestic unemployment which will effects a direct bearing on the upcoming presidential election. To court the support of voters and deal with complex wrangles among political forces in the country, the US government has always been exerting pressures on China.

In Japan's case, with its economy hovering at a low ebb for more than a decade and Koizumi's economic reform landed in a quagmire, the Koizumi administration, facing the declining support for it, found that the RMB exchange rate is the best distraction for the domestic disappointment sentiment toward its reform..

How would the appreciation of RMB yuan influence Asia?

Professor Lin mentioned that the voice asking for a stronger yuan was scarcely heard in developing countries in Asia. These countries are generally enjoying trade surplus with China and their businesses are moving to China. So they do not expect yuan to appreciate.

Should the RMB appreciate, the following situation would appear in Asian countries including the ASEAN.

First, the Chinese products would be less competitive than the products from other Asian countries whereas the competitiveness of products from ASEAN would be increased in the Asian and world market.

Secondly, overseas investment from Europe, the US and Japan would gradually shift to ASEAN from China. China would have less capital influx from ASEAN while the latter would see overseas investment inflow faster.

Generally speaking, developing countries in Asia have no strong desire for a stronger yuan. What's more, the appreciation of RMB yuan has become a political and diplomatic issue rather than an economic and commercial one.

RMB should be pegged with several major currencies

Lin noticed that China has repeatedly stressed it would keep the rate of exchange basically stable and have the market economy to leverage the rate. He concluded that a stronger yuan would harm rather than secure the sustained development of the Chinese economy. In the meantime, it would not act as a catalyst to beef up the Japanese or American economies. It would bring more side effects than advantages to the recovery and stable growth of the Asian economy. So there is no reason for RMB yuan to appreciate, particularly an appreciation by a big margin.

However, with China's WTO accession, the Chinese economy has fully merged into the world economy. As its national economy develops, the value of RMB cannot remain unchanged and the adjustment of the yuan exchange rates will be inevitable.

Lin insisted in principle that the exchange rates of RMB must not be adjusted sharply by a big margin. To ward off big risks, the yuan should be linked with a few major currencies in the world. (Besides the US dollar, more proportion should be accentuated on Euro and Japanese yen. The violent fluctuation of yen against the US dollar should be taken into consideration.)

In addition, China should step up its cooperation with Asian countries and regions on fiscal and monetary policies to secure the exchange rates of Asian currencies including RMB basically stable.

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