The background of RMB appreciation

2006 is destined to be an unusual year for the Chinese economy. On the one hand, China's economy continues to maintain strong growth. It is estimated that China's GDP growth rate reached 10.7% in 2006, and its per capita GDP has exceeded US$2,000, both of which are record highs. According to the global trade report published by the WTO, in 2006, China ranked third in the world in terms of global merchandise import and export volume, after the United States and Germany. All signs indicate that China's economy is becoming one of the main driving forces of global economic growth with its strong growth. But amidst this peaceful scene of singing and dancing, some countries cannot sit still. He deeply feels the tremendous pressure brought by China's economic growth. This country is the United States, the world's number one power. In 2006, the Sino-US trade surplus reached US$144.26 billion, the highest in history. Therefore, the United States used the excuse that Chinese workers had taken away American workers' jobs and the huge trade surplus caused losses to them, and carried out economic "blackmail" against China in an attempt to increase the value of the RMB. In order to adjust and ease the trade friction and the economic "war" between China and the United States, China and the United States held the first Sino-US Strategic Economic Dialogue in December 2006. Chinese Vice Premier Wu Yi and U.S. Treasury Secretary Paul Nelson, as the special representative of the two heads of state, co-chaired the dialogue. As expected before the meeting, RMB appreciation became the focus of the dialogue. At that time, a senior official of the U.S. Treasury Department said that the RMB exchange rate was a core part of this dialogue. U.S. Treasury Secretary Paulson said in an interview with U.S. media at the time that a more flexible RMB exchange rate would help China allocate funds more effectively. "The whole world will not tolerate China adjusting the RMB exchange rate at such a slow speed."

In fact, the U.S. Senate has passed a resolution, but of course the vote is now postponed. What is its content? It's very simple. If the RMB does not appreciate significantly by October this year (2006), all products from China will be subject to a 27.5% tariff. This is a big matter for China. Fortunately, the U.S. Senate left some leeway and postponed the vote. This means leaving some time to see China's attitude. This situation is really serious. Why does the United States exert so much pressure? On the surface, RMB foreign exchange is a monetary and financial phenomenon, but RMB appreciation is ultimately a matter of trade deficit. The United States has had a foreign trade deficit every year for more than two decades since 1982. In the 1980s, it was tens of billions of dollars. In the late 1980s, it exceeded 100 billion U.S. dollars, or even 200 billion U.S. dollars. In the 21st century, the annual trade deficit has reached as high as 500 billion U.S. dollars. Foreign exchange is like cash in a person's pocket. If you lose some at the beginning, you can borrow some outside, but who will dare to lend it to you if you keep losing? However, the reason why the United States has not collapsed for so many years despite its huge trade deficit is because of its special status in the world. With so many delicious, easy-to-use, and easy-to-wear things coming to the United States, it just needs to use its money-printing machines to print more. The increase in the issuance of U.S. dollar bills offsets the trade deficit. The trade deficit has been so large for more than two decades, and everyone has lost confidence in the US dollar. The United States will soon face a situation like the 1960s, when everyone regards the US dollar as a hot potato! So in recent years, it has felt that this problem must be solved. How to solve it? There was no other way, so they adopted a method. In the past, the United States pursued a strong dollar policy, which was to try every means to build people's confidence in the U.S. dollar. The U.S. dollar's foreign exchange was maintained at a relatively high level, so that the U.S. dollar would be stronger. However, seeing that the foreign exchange trend of the U.S. dollar is very strong, ordinary people have confidence. Once they have confidence, everyone will hold on to the U.S. dollar. But in recent years, it has no solution, so it has changed its "strong dollar policy" to a "weak dollar policy", and when the U.S. dollar's foreign exchange falls, it will produce a foreign exchange dumping effect. When the euro was strong against the U.S. dollar, 1 euro could be exchanged for 0.8 U.S. dollars. The United States tried to make the U.S. dollar exchange rate weaker, so that 1 euro could be exchanged for 1.3 U.S. dollars, and the U.S. dollar depreciated against the euro. The U.S. Treasury Secretary said that "in order to solve the U.S. trade deficit problem, a weak dollar policy can be adopted." However, President George W. Bush has never admitted that he has a weak dollar policy. He has always emphasized that he has a strong dollar policy. This will have an effect on Japan and the European Union. The exchange rate of the US dollar against the Japanese yen and the euro will fall, and the trade deficit with them will shrink, and there may even be a surplus in some trade goods. But it does not have any effect on China. Why? Because before this, China’s RMB foreign exchange system was, in official terms, “a single managed floating exchange rate based on market supply and demand.” This statement was actually pegged to the U.S. dollar in the specific operation process. During the Asian financial crisis, the RMB has been pegged to the U.S. dollar. When the U.S. dollar rises, so does it. When the U.S. dollar falls, so does the U.S. dollar. The U.S. has quietly changed its policy from a strong U.S. dollar to a weak U.S. dollar in order to change the trade deficit, but this is not good for China. It works. No matter how much the yuan falls, it just doesn't change, and the United States will feel very dissatisfied. Because the largest trade deficit in the United States now comes from China, and the trade deficit with China is the largest among all trade deficits in the United States.

According to U.S. statistics, China "lost" US$160 billion last year. According to this year's forecast, it will be at least US$200 billion. China alone will lose US$200 billion. What about the total trade deficit of US$500 billion? Only then can it come down! This is the most important purpose of the United States' efforts to suppress the appreciation of the RMB. The official attitude of the United States is that "the RMB foreign exchange system must show greater flexibility." To put it bluntly, the RMB should no longer be pegged to the U.S. dollar, otherwise no matter how the U.S. dollar changes, it will have no effect on China! Of course, we will not pay attention to the groundless accusations of the United States, nor will we fully accept the excessive demands of the United States, because there are many and complex reasons for the huge trade deficit between China and the United States, such as China's labor price advantage and the promotion of China's rapid economic development. As well as the coveting of the Chinese market by multinational companies, etc., American companies opened factories in China and exported finished products to the United States. On the surface, the United States suffered a loss, but in fact it was American companies that made most of the profits. However, as the United States is the only superpower in the world today, with its own strong economic, military, and technological strength, we have to make some concessions for our better development in the future.

The process of RMB appreciation

On July 21, 2005, under strong pressure from the United States and in order to create a good external environment for China’s economic development, the Chinese government finally made The decision to appreciate the RMB was made. From 8.27 to 8.28, 1 US dollar against the RMB broke through the 8.2, 8.1, and 8.0 levels successively, and the appreciation rate in 2005 reached more than 3%. Entering 2006, the RMB has been "progressing rapidly". On January 4, 2006, the central parity rate of the RMB exchange rate started at 8.0702. The RMB exchange rate has experienced a process of rising slowly, then running quickly, and then "accelerating". Calculated based on the central parity rate of 7.8087 on December 29, the RMB appreciated by 2,615 basis points during the year.

The quotation on January 4, 2006 was exactly the same as the last trading day of the previous year. From this day on, inquiry trading, an international mainstream trading mechanism, was introduced into China, revealing major reforms in foreign exchange trading methods and the RMB exchange rate formation mechanism. The central parity rate of the RMB exchange rate was also given a more market-oriented formation method. The RMB exchange rate is destined to operate in a more flexible manner this year.

On May 15, the central parity rate of the RMB exchange rate exceeded 1 US dollar to 8 yuan for the first time. In the next two months, the RMB exchange rate has been fluctuating around this important threshold. On July 20, the central parity rate of the RMB exchange rate once again "broke 8" and then continued to decline, bidding farewell to this key position.

It broke 7.96 on August 30, broke 7.90 on September 28, and the RMB exchange rate exceeded 7.88 on October 30. In the following month, the RMB exchange rate broke through 7.87, 7.86, 7.85, and the 7.84 mark on November 29. On December 4, the central parity rate of the RMB exchange rate broke through the 7.83 mark again, setting a new high since the exchange rate reform at 7.8240. Since the exchange reform, the cumulative appreciation of the RMB exchange rate has exceeded 3.65%. On December 14, the day when the first China-US Strategic Economic Dialogue was held, the central parity rate of the RMB exchange rate broke through the 7.82 mark for the first time. The next day, the central parity rate of the RMB exchange rate hit a new high after the exchange rate reform at 7.8185. Calculated based on the data of that day, the RMB has appreciated by more than 3.72% cumulatively since the exchange reform. On December 29, the RMB exchange rate reached a new high since the exchange rate reform, and broke through the 7.81 mark for the first time to reach 7.8074.

Data from the China Foreign Exchange Trading Center show that the monthly average exchange rate of the RMB in 2006 has appreciated from 8.0688 in January to 7.8652 in November.

Beginning in the second quarter of 2006, the U.S. economic engine slowed down significantly, and market expectations for the Federal Reserve to cut interest rates increased, causing the U.S. dollar to weaken across the board in the international foreign exchange market, which triggered a continued rise in the RMB exchange rate. On the other hand, China's foreign exchange reserves exceeded the US$1 trillion mark in October, and the cumulative trade surplus in the first 10 months has reached US$133.6 billion. These have become important driving factors for the appreciation of the RMB.

2007. , the trend of accelerating RMB appreciation has become clear. From New Year's Day to early March 2007, the RMB has appreciated cumulatively by 0.898%, 2.5 times that of the same period in 2006. In May 2007, the RMB exchange rate exceeded the 7.7 mark, causing the RMB appreciation in 2007 to reach 1.458%. It can be seen that the appreciation of the RMB has begun to enter the "fast lane". No one dares to say what the future trend will be, but one thing is certain, that is, there is still a lot of room for RMB appreciation within a period of time.

Impact on China’s stock market

From historical experience, when the currency of a country or region appreciates, the stock market of that country or region will rise. The RMB has appreciated by nearly 7%. Although the increase is not large, it also indicates that China has opened the "door" to RMB appreciation, and the RMB has entered the appreciation channel. The expectation of RMB appreciation by foreign hot money will inevitably attract the rapid inflow of speculative funds, thereby promoting the rapid rise in asset prices in the stock and real estate markets. Japan, Thailand and Taiwan have all experienced this process.

Statistics show that each round of appreciation of the yen that year corresponded to a period of continued rise in the Japanese stock market.

The entire rising process, from the start in 1972 to the final end in 1989, lasted for 17 years, with an increase of 19 times. In the 18 years from 1972 to 1989, the Japanese yen appreciated in 13 years, of which the appreciation rate exceeded 15% in 6 years. The stock market has been on the rise for 15 years, of which the increase exceeded 20% in 6 years. The year with the largest increase was 1972, when the Japanese yen was adjusted from the fixed exchange rate of 1:360 to 1:301 for the first time, and the Nikkei index rose by 91.91% that year; followed by 1986, that is, after the "Plaza Accord" was reached In the first year, the Nikkei Index rose by 42.61%. Therefore, the initial appreciation of the yen has the greatest positive stimulating effect on the stock market and the most significant push to the index. Looking back at the current Chinese stock market, since the Lunar New Year in 2007, the Shanghai Composite Index has almost been "sitting on a rocket" and has been soaring. Although it has experienced some ups and downs, no one can stop the "mad bull" Chinese stock market. Just like the appreciation of the RMB, the Shanghai Composite Index easily broke through each barrier one after another, reaching the historical "commanding heights" of 4,300. It seems that China's bear market, which has been silent for many years, has suddenly become bullish. The entire Chinese securities market is booming. Countless retail investors have withdrawn their money originally deposited in banks and plunged into the sea of ??stocks. But if you think about it carefully, who is the real "bookmaker" in the Chinese stock market? Let’s not talk about bookmakers in the traditional sense. The main discussion here is foreign hot money. The appreciation of the RMB is like a freshly baked cake, attracting the appetite of hot money from all over the world. The appreciation of the RMB means that the RMB is more "valuable". Specifically, when the RMB exchange rate was 8.27, 100 US dollars could only be exchanged for 827 yuan, but now 100 US dollars can only be exchanged for about 770 yuan. On the surface, China seems to have taken advantage, but the hot money from foreign speculative groups is not that stupid. Before the Chinese government announced the appreciation of the renminbi, they converted a large amount of U.S. dollars (estimated to be hundreds of billions of dollars) into renminbi through various channels, betting heavily on the appreciation of the renminbi. After these hot money enters China, they will invest, mainly in the stock market and real estate. They have brought China's stock market and real estate to a boom, causing countless Chinese funds to follow up, creating a prosperous scene. Then the yuan began to appreciate as expected, and foreign speculators were very happy. On the one hand, their investment in China itself has been rewarded. Even if the RMB exchange rate does not change, based on the normal profit rate of 20% a year, 10 billion U.S. dollars (according to the exchange rate at the time was 82.7 billion yuan) will be nearly 100 billion U.S. dollars at this time. RMB. On the other hand, when the RMB appreciates to 7.70, the hot money is ready to retreat. At this exchange rate, 100 billion RMB becomes 13 billion US dollars. With this in and out, foreign speculators made US$3 billion in vain! What's more, the real hot speculative money in China is hundreds of billions of dollars! The hot money has been withdrawn, what is left for China? The loss of huge amounts of money will inevitably cause people to lose confidence in the market, and then it will collapse. It is the Chinese people who will suffer.

The impact on China’s foreign trade

It can be said that the appreciation of the RMB has the greatest impact on China’s export trade. The trade friction between China and the United States is based on China's huge trade surplus with the United States. Once the RMB appreciates, China's currency advantage will disappear. Originally, a 100-yuan product in China cost just over 12 US dollars when sold to the United States. Now the same product costs nearly 13 US dollars when sold in the United States. Obviously, the appreciation of the RMB is very detrimental to my country's export trade. On the other hand, the appreciation of the RMB has also made China less attractive to foreign investment and construction of factories in the mainland, because production costs have increased. The same wages paid to Chinese workers, which used to be only US$100, now cost US$108. China's huge trade surplus with the United States should be alleviated to a certain extent with the appreciation of the renminbi, but it can be seen that the appreciation of the renminbi has a limit after all. The RMB is currently appreciating by about 7%. The United States hopes that the RMB will appreciate by 10% to 40% to resolve Sino-US trade issues. However, experts predict that the RMB appreciation that the Chinese economy can bear is 7% to 10%. Therefore, China does not consider its own interests. It is likely to cause the RMB to appreciate significantly. In fact, foreign capital and joint ventures account for a large part of China's seemingly huge exports. In 2006, China's export volume of more than 600 billion was about 60% of the exports of foreign-funded enterprises. Real domestic enterprises include state-owned enterprises, collective enterprises, and private enterprises. In short, less than 50% of China's own enterprises. At present, the main line of economic and trade relations between China and the United States has become American investment - Chinese manufacturing - American consumption. To give a simple example, assume that the original cost of producing a pair of Nike shoes in the United States was 20 US dollars. Now after it is transferred to China, the cost price offshore China is 4 US dollars. Among them, the cost price for China to purchase the materials for this pair of shoes from abroad is 2 US dollars, the profit earned by Chinese companies is US$0.4. What China earns is nothing more than employee salaries and taxes paid by companies. China's wages are much lower than those in the United States, and many provinces and cities have preferential tax policies for foreign-invested enterprises, so we have not received much benefit from these two aspects. But it is such a situation that forces our enterprises to move in the direction of high added value. Companies with low added value will be eliminated by the market sooner or later, and the appreciation of the RMB will undoubtedly accelerate this process.

The appreciation of the RMB will have a huge impact on China’s exports, but we must also see the benefits it brings. I think the biggest benefit of RMB appreciation is that it partially calms the anger of the United States. Let’s not discuss for the moment whether it is right or wrong for the United States to blame all the trade deficit with China on the RMB exchange rate. Based solely on the economic strength and global influence of the United States, we have to follow his eyes and act. 40% of our annual exports are to the United States. The United States is a highly dependent market for China. If we hold on to the RMB exchange rate and have a "head-on" confrontation with the United States, I believe it will be China that suffers the biggest loss in the end. A flexible exchange rate policy is exactly our goal. We cannot blindly obey the United States, nor can we be arrogant and "play it real" with it. After all, our strength is not enough. Responding flexibly to U.S. accusations is to buy China more time for modernization. Another benefit is that it is conducive to China's economic structural adjustment. China's huge surplus may look perfect on the surface, but there are still crises lurking behind it. A general trade surplus illustrates the strength of a country's exports, its commodity advantages and economic strength. But a huge surplus shows that the country is overly dependent on foreign markets. For example, in 2006, our foreign trade export volume was US$969.1 billion, accounting for more than 30% of the total GDP. The huge surplus represents correspondingly huge production capacity. If one day China and the United States become hostile and the United States restricts imports of goods from China, who will our products be sold to? Can our current sluggish domestic demand be able to digest so many commodities? This will inevitably lead to the bankruptcy of some companies that rely on exports and the unemployment of employees. Isn't China still suffering? The current appropriate appreciation of the RMB will ease the pressure in this regard.

Impact on various industries

1. Foreign exchange liability industries will obviously benefit, including aviation, trade and other industries. Since these industries have a large amount of foreign exchange liabilities (especially US dollar liabilities), the appreciation of the RMB will bring exchange gains and losses to these industries. Especially airline companies, which often have huge US dollar liabilities, will benefit significantly.

2. Industries that import raw materials or components will also benefit, mainly including papermaking (import of pulp), steel (import of iron ore), cars (import of some important parts), and petrochemicals (import of crude oil) ), chemical fiber and plastics (imported raw materials), aviation (imported aviation equipment), clothing (imported high-end fabrics) and other industries. Since these industries need to import relevant raw materials and components every year, the appreciation of the RMB will reduce the costs of these industries to a certain extent. For example, the cost of pulp in China's papermaking industry accounts for 70%, and 38% of the pulp is imported. Therefore, the appreciation of the RMB will significantly reduce the cost of the papermaking industry, thereby significantly improving the profitability of the papermaking industry.

3. The investment products industry will also be sought after by a certain amount of funds, mainly including real estate with land value, park development and other industries, and coal, non-ferrous metals and other industries with resource value. Since the appreciation is not large this time, it is possible for overseas funds to obtain appreciation gains by investing in land or real estate owned by companies in these industries, thereby increasing the attractiveness of funds to these investment industries, thereby triggering an increase in prices. .

4. Traditional export-oriented industries have been directly affected, including textiles and clothing, home appliances, machinery and other products. Due to the rising costs caused by the appreciation of the RMB, the profit margins of these industries will decrease, but we believe that an appreciation of only 2% will have little impact. Through cost compression and appropriate price transfer, companies in these industries, especially leading companies, will Have strong ability to resist risks.

5. Industries with international pricing will be affected to a certain extent, including non-ferrous metals with fully international pricing, petrochemicals, steel, electronic components and other industries with partially international pricing. Due to the product prices of these industries They are greatly affected by international prices, so the appreciation of the RMB will cause their selling prices to decline when priced in RMB, resulting in a decrease in profits.

6. Industries that are replaced by imported products will also be adversely affected, including automobiles, construction machinery, steel, home appliances, etc. The competition between the products of these industries and foreign imported products is relatively fierce, and the appreciation of the RMB will lead to a decrease in the quoted price of foreign imported products in RMB, thus causing a certain decline in the competitiveness of local products, and thus affecting the profitability of these industries.

7. The foreign trade service industry may be indirectly damaged. Since the appreciation of the RMB may have a certain adverse impact on my country's foreign trade, especially exports, it may have a certain adverse impact on ports, airports and the shipping industry. However, as the appreciation stimulates imports, there may also be a certain increase. Therefore, The magnitude of the impact is relatively small.

The impact of RMB appreciation on various industries is relatively complex and multi-angle, and is often a combination of negative and positive effects. Comprehensive analysis, combined with the analysis of changes in the profitability of key companies in various industries when the RMB appreciates by 2%, shows that the appreciation of the RMB will be beneficial to industries such as aviation, papermaking, park development, real estate, communications operations, and communications equipment, but in addition to aviation Outside the industry, the benefits are not high, but there are certain negative effects on industries such as steel, audio-visual equipment, oil exploration, textiles and clothing, components, etc. However, judging from the changes in the performance of the key companies we track, the degree is not significant.

In other industries, the situation is generally more neutral.