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Long-term RMB reform benefits China and US

By He Fan (China Daily)
Updated: 2007-08-07 17:40

The author He Fan is a researcher with the Institute of World Economics and Politics at the China Academy of Social Sciences

The reform to China's exchange regime is being carried out in a market-orientated means toward a long-term target. Turing it into a political issue would only harm the process or even tarnish the ultimate target itself.

China's exchange regime is one of the major topics in the Strategic Economic Dialogue between China and the United States, which began in September 2006. The talks are only one indication of the US government's concern over China's exchange rate.

Before commenting on America's over-concern, it is necessary to examine the gains and losses of the US on the renminbi exchange rate issue.

Special coverage:
RMB Revaluation
Related readings:
 China 'won't bow' to yuan pressure
 Yuan steady despite pressure
 Survey: RMB revaluation manageable for exporters
 Economists warn of risks of continued yuan appreciation
Will the United States reap great benefit from a significant renminbi appreciation? Certainly not.

China will see reduced exports as a consequence of renminbi appreciation, but the US will not stop buying the necessities it requires. US importers may turn to other developing countries. But if the commodities from those countries are more expensive than Chinese goods, the switch does not improve the US's international balance by reducing its trade deficit.

If China loses its share of the international market for the yuan appreciation, its economic growth will be slowed, cutting down its imports from the US. It will not help reduce the US trade deficit, either.

Commodity trade aside, the renminbi's appreciation will also hurt the US in capital account items. US direct investment will become less rewarding after the yuan gains against the US dollar, decreasing US profit from international investment.

As a matter of fact, the US has more to gain if China maintains the renminbi at a stable level.

When the US manufacturers shift their factories into China for the relatively lower costs here, US customers still enjoy the products by importing them from China. The consumption of resources, energy and the pollution to the environment during the manufacturing process are all left in China.

When the yuan is stable, the US has a more important advantage.

Thanks to the trade surplus, China has accumulated a large sum of US dollars and its world largest foreign exchange reserve is mostly in US dollars. Such a big sum, a considerable portion of which is in the form of US treasury bonds, contributes a great deal to maintaining the position of the US dollar as an international currency.

Russia, Switzerland and several other countries have restructured their foreign exchange reserve and reduced the US dollars they hold. China is unlikely to follow suit as long as yuan's exchange rate is stable against the US dollar.

The Chinese central bank will be forced to sell US dollars once the renminbi appreciates dramatically, which might lead to a mass depreciation of the US dollar against other currencies.

The Chinese government launched an exchange reform regime years ago. The renminbi will be appreciated gradually, the exchange regime would evolve in a managed floating exchange rate system and an effective foreign currency market would be established.


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