Is the Chinese currency, the renminbi, dangerously undervalued and a threat to the global economy? Over thirty important experts offer their views

International Economy, The, Spring, 2003

In Japan, some politicians and bureaucrats are calling for the yuan to be revalued, but the revaluation of the RMB without reform of the financial system would simply cause confusion and disturbance. The Chinese government now appears to seriously consider some reform programs as a member of the WTO. Since the government hitherto used to act in an incremental way, the pace of progress would be slow and clumsy. At the moment there may be no other alternative, but there is a risk that such incremental approach ends up with "too late, too little." It will be of some help for the Chinese officials to reexamine Japan's experience since the early 1960s.

China should boost domestic demand rather than revalue.

XIN XIE
Asia Economist, Bank of America, Singapore

There is no clear indication that the currency is undervalued. First, the REER (real effective exchange rate) of the RMB has appreciated by about 50 percent since 1990. It has stayed roughly at the same level as it was at the beginning of 1998. Second, the currency account surplus is just about 1.5 percent of GDP if transfer payments are excluded. Third, the recent foreign direct investment inflows are likely to be more oriented toward the domestic market than the earlier foreign direct investment inflows from Hong Kong and Taiwan, reducing their impact on exports. Additionally, those inflows will likely have to import materials in their production for the domestic market, leading to a smaller current account surplus. Finally, deflation in China means that the current account surplus is partly due to weak demand in China, not due to the weakness in the currency. The fight policy for China is to boost domestic demand, rather than revalue its currency.

The concerns over the impact of the rising competitiveness of Chinese exporters are justified. Their impact will be big and far-reaching. But the impact is a positive shock rather than a negative shock in the sense that once the necessary adjustment is made by the rest of the world according to the comparative advantage of each economy, the world will benefit in the net from the emergence of China. The concern should be over how to find the best way to adjust and take advantage of China's emergence rather than how to stop it, or to slow it.

Parallel with the small current account surplus is the fact that growth in exports is matched by growth in imports of goods and services. Thus, China puts downward pressure on prices in the industries of its exports, but puts upward pressure of similar magnitude on the prices of the industries of its imports. The difference is that the impact on exports prices is more concentrated than the impact on the world price of imported products, making the latter less noticeable.

In aggregate, China's emergence does not reduce demand for the rest of the world. In fact, it adds to the global demand as the fastest growing economy, if one does not take a simplistic accounting view of the world. Thus, the emergence of China does not require a monetary response. It requires structural changes to facilitate the realignment of industries given the challenge and opportunities.