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RMB to Appreciate after China's Entry into WTO?
Recent reports from foreign financial institutions suggesting that the Bank of China will widen the band within which the renmenbi (RMB) and US dollar trades has caused a huge uproar in the finance industry. Foreign financial institutions think that because China's exports are strong, now is a good time to expand the range which the RMB is traded. After China joins the World Trade Organization, the Bank of China is expected to loosen the range of the RMB, which will put pressure on the RMB to appreciate.
Since the East Asian financial crisis hit three years ago, there has been a great deal of attention focused on whether the RMB would be devalued or not. As the region recovers from the crisis, the concern over devaluing the RMB has lessened. But, recent reports researching whether the RMB exchange rate should be floated has caused foreign markets to focus on the RMB again.
On July 6, Morgan Stanley Dean Witter released a report saying that because the global economy is currently in a period of strong growth, causing China's exports to rebound, the conditions for expanding the range of the RMB can fluctuate are good.
Chinese exports to non-US dollar economies currently account for half of all Chinese exports, 34% of which are exported to Asia. Morgan Stanley says that if the range of the RMB is too narrow, when Asian currencies are hit, China's economy will also suffer. Also, since China is currently facing deflation, loosening the range of the RMB could be a tool to calibrate the economy.
In recent years, China has maintained a trade surplus against other countries. This year, China's exports have witness a large increase, making the conditions to appreciate the RMB ripe. But because China still does not let the RMB float more than 2%, it's as if the RMB is pegged to the US dollar.
Hongkong and Shanghai Banking Corporation (HSBC) China operations research manager Zhao Lingbin points out that if the government allows the RMB exchange rate to fluctuate, it would allow pressure to appreciate or devalue the RMB to slowly dispel. By letting the RMB float, the foreign exchange rate and the basic market factors could regulate each other. Using this as the basis to eventually let the RMB freely float, the problems arising from freely floating the RMB would be lessened.
China's foreign exchange system underwent a major reform in 1994 when it basically let the market set the exchange rate. If the range that the RMB is allowed to fluctuate is expanded by several percentage points, it would not be abnormal and would not send huge tremors through the financial community. But there are two questions which should be kept in mind. 1) China's reforms in many areas still are not complete, which could affect the foreign exchange balance. 2) China has yet to sign an international agreement to manage the flow of short-term capital from multinational companies.
Experts point out that China has maintained a policy of keeping the RMB stable. If the RMB depreciates or appreciates by a large degree, it would not be favorable towards either China's trade balance nor its entire economy. The foreign exchange rate is a sensitive economic index. The government will be very careful when it comes to loosening controls on it.
The course which the range which the RMB is allowed to fluctuate to letting the RMB float freely to making the RMB freely convertible is a gradual process. Making these changes at the most appropriate time will allow the shock of these changes remain minimal.
By gradually allowing these changes to happen, the RMB will avoid huge changes (either appreciation or devaluation), which in turn, will not greatly affect China's neighboring economies.
Changes in the RMB do not seem to affect the exchange rate of the Hong Kong dollar. Hong Kong Monetary Authority Chief Executive Joseph Yam recently reiterated that since 1998, the link between the Hong Kong dollar and RMB exchange rate has disappeared. There are two separate economies in Hong Kong and China's mainland, which use two different currencies and have two distinct foreign exchange policies. Thus, when news that there might be changes in the RMB exchange rate, the Hong Kong dollar excange rate and interest rate remain unmoved.
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