The main basis for not depreciating the RMB

The Chinese government and most scholars believe that the Chinese government has long abandoned the traditional method of relying on currency devaluation to stimulate economic growth. Insisting on the non-depreciation of the RMB not only demonstrates a high sense of responsibility in contributing to the stability of the financial order throughout Asia and the world, but also embodies China's strategic principles of formulating monetary policies based on its special economic structure. Within a certain period of time, the RMB should remain stable. A depreciation of the RMB would do more harm than good. The main reasons for the non-depreciation of the RMB are summarized as follows:

(1) The stability of the RMB exchange rate has a strong material foundation

The RMB exchange rate is directly determined by the supply and demand situation in the foreign exchange market, and the supply and demand in the foreign exchange market The situation is determined by the current account, capital account, etc. in the balance of payments. From 1998 to 1999, the current account still maintained a large-scale surplus, foreign direct investment in China still maintained relatively rapid growth, and the international balance of payments showed double surpluses in the current account and capital account. At the same time, external debt remains at a moderate scale and the structure of external debt is basically reasonable. Under this premise, there is no need for the RMB to depreciate, and there is no need to depreciate.

1. Maintaining an import and export surplus is the basic basis for the RMB not to depreciate. In recent years, China's foreign trade has always maintained a surplus. Even in 1997 and 1998, when the global economic crisis was severe, China's current account surplus in the international balance of payments reached US$40.4 billion and US$43.6 billion respectively. In 1999, China's Despite heavy import efforts to adjust the domestic economic structure, the foreign trade surplus from January to November still reached US$26.4 billion, and is expected to be close to US$30 billion for the whole year. The foreign trade surplus has become the market basis for the RMB exchange rate to remain stable.

2. The capital account also maintained a relatively large surplus. Since 1992, China's foreign direct investment has grown rapidly. In 1997, when a global crisis occurred, China's foreign direct investment still reached US$45 billion, accounting for 11% of the world's total. At present, China is still the developing country that attracts the most foreign investment.

3. Maintained high foreign exchange reserves. In 1999, my country's foreign exchange reserves reached US$154.675 billion, an increase of US$9.716 billion compared with 1998. The adequacy of China's foreign exchange reserves is mainly reflected in: (1) The ratio of foreign exchange reserves to short-term debt, the international warning line is 80%. China's foreign exchange reserves are about 600% of short-term debt; (2) The time for foreign exchange reserves to support imports is 3-4 months according to the international standard. Currently, China's foreign exchange reserves can support imports for more than 11 months. Sufficient foreign exchange reserves provide guarantee for the stability of the RMB exchange rate. On December 30, 1999, the weighted average exchange rate of the RMB against the US dollar was 8.2795 yuan/US dollar, and the RMB exchange rate continued to remain stable.

(2) RMB depreciation is not conducive to foreign trade and repayment of foreign debt

1. RMB depreciation cannot fundamentally improve export competitiveness. In addition to the RMB and the Hong Kong dollar, the currencies of major countries and regions in East Asia and Southeast Asia have all depreciated, which to a certain extent will affect the competitiveness of my country's products in the international market. However, when these countries suffer economic difficulties, they will inevitably reduce their imports and will never increase their imports due to the depreciation of the RMB. Moreover, 60% of my country's export products rely on imported raw materials or processing with supplied materials. Depreciation will inevitably increase the price of imported raw materials, weaken the competitiveness of export enterprises, and is not conducive to expanding the scale of exports. Fundamentally speaking, deepening the reform of the foreign trade system and improving the management level of foreign trade enterprises are the long-term and reliable guarantee for maintaining export competitiveness.

2. The non-depreciation of the RMB will benefit imports. In accordance with the principle of import and export balance, in order to reduce trade frictions with major trading partners and maintain a balance of international payments, my country needs to increase imports. The currencies of countries such as Japan, South Korea, Southeast Asia and Russia have depreciated, and the prices of goods imported from these countries will be lower, providing good conditions for my country to import advanced technical equipment and raw materials from these countries. This will not only be beneficial to the expansion of my country's exports to other regions, but also be conducive to the technological transformation of domestic enterprises and accelerate industrial upgrading.

3. If the RMB does not depreciate, it will not be conducive to repaying international debt. Although my country has large foreign exchange reserves, it also has a lot of external liabilities. At present, my country's external borrowing exceeds 100 billion US dollars. The direct consequence of currency depreciation is that the cost of repaying debts increases, while the effect of stimulating foreign trade exports is limited, and the depreciation is not worth the loss. In particular, our country currently borrows US$17.8 billion from Japan. According to data, a large number of Japanese yen loans have matured in recent years. However, Japanese banks are currently suffering from serious bad debt losses and the domestic economy is in a sluggish state. It is possible that these loans will be extended when they expire. The difference is very small. Therefore, the depreciation of the yen is very beneficial to my country's repayment in the near future.

(3) The decline in export exchange costs is an important basis for the non-depreciation of the RMB

In actual policy operations, export exchange costs are the primary factor in determining the exchange rate. After China successfully controlled inflation in 1993, domestic prices dropped year by year. By the end of 1999, domestic price growth had been negative for nearly 30 months. The continued decline in domestic prices is an intrinsic factor for the stability of the RMB value.

In fact, during the Asian financial crisis, my country's exports of products to Europe and the United States rose instead of falling, which is a good example.

From the perspective of external borrowing and financing, RMB depreciation will not only increase the debt repayment burden of enterprises, but also increase the cost of new external financing and further increase the production and operating costs of enterprises, which is not conducive to the The development of enterprises will also further affect the realization of the goal of rapid economic growth.

(4) China’s current foreign exchange management system is highly resistant to shocks

The reason why the RMB does not depreciate is because China has certain economic strength and management capabilities as the foundation. China considers its currency exchange rate issues from a global strategic perspective.

China's foreign exchange market is a limited open foreign exchange market under the guidance of macro policies. The basic principle of China's capital account foreign exchange receipts and payments management is to improve capital account management while relaxing current account exchange restrictions. Since capital accounts are still strictly managed, foreign banks cannot directly operate RMB business, let alone buy or sell forward RMB. This can avoid the impact on the financial market caused by large inflows and outflows of capital and ensure the stability of the exchange rate. After the outbreak of the Southeast Asian financial crisis, this management system was ineffective in resisting external shocks and ensuring the stability of the RMB exchange rate.

Judging from the timing of policy operations, the most difficult period causing the depreciation of the RMB has passed. When the yen depreciated to 146 yen per US dollar, there was indeed great depreciation pressure on the renminbi. Today, the RMB is still pegged to the U.S. dollar between 8.27 and 8.3, and the U.S. dollar has depreciated by more than 20% against the Japanese yen. It is more likely that the U.S. dollar will weaken against the Japanese yen in 2000. The RMB is pegged to the U.S. dollar, and it has The US dollar has depreciated relatively, and the RMB has no reason to depreciate itself.

Psychological expectations have a huge impact on financial markets. RMB depreciation will inevitably shake domestic and foreign confidence in my country's monetary and exchange rate policies, trigger abnormal capital flows and credit crises, lead to excessive fluctuations in the RMB exchange rate, and lead to serious imbalances in the entire financial system and the balance of payments structure.

(5) The current economic development strategy requires the stability of the RMB

In the early days of reform and opening up, China faced the "double gap" of international trade and domestic savings. Expanding exports is not only an important factor in international revenue. The need to balance expenditures is also the need to make up for the lack of domestic savings. China has achieved quantitative expansion of exports through the implementation of its coastal opening strategy. Among them, the depreciation of the RMB has exerted a greater leverage effect. From 1981 to 1999, the RMB exchange rate depreciated from 1.7 RMB/USD to 8.2795 RMB/USD in 1999. When the exchange rates were unified in 1994 alone, the RMB depreciated by more than 30%.

At present, the RMB does not depreciate. In addition to the foreign trade surplus, the more important reason is that China's domestic savings rate has always maintained a high level. From 1992 to 1997, the ratio of China's national savings to GDP remained basically at 41%. China's economic development must rely more on the support of domestic savings and investment. Currency devaluation is a measure to improve international competitiveness, stimulate exports and revive the economy, but China's long-term strategy for developing exports is based on improving the quality and technological content of its own products and services. RMB depreciation may bring temporary and short-term export stimulation, but it cannot fundamentally solve the problem of China's international competitiveness.

In 2000, China will implement the Western Development Strategy. Devaluation is a redistribution of domestic wealth resources and productivity distribution. Since foreign-invested enterprises and export-oriented enterprises are mostly concentrated in the southeastern coastal areas, the direct beneficiaries are the southeastern coastal areas. This distribution is not conducive to enterprises in the central and western regions and the domestic market, especially large and medium-sized state-owned enterprises. Devaluation actually means that the people of the country and all sectors have reduced their vested interests to support export companies at the forefront of the international market to be more capable of participating in international competition. Currently, the main force in exports is foreign-funded enterprises, and China has received very few real benefits. If the export speed is reduced, their export structure can be improved and their technical level improved.

(6) It is China’s obligation as a major country not to depreciate the RMB.

The objective facts of China’s economic development show that when the currencies of neighboring countries are depreciating, it is consistent with maintaining the stability of the RMB value. Measures to sober up China’s national conditions.

1. From an international perspective, due to the closeness of international economic ties, if the RMB depreciates, it will lead to another round of competitive devaluation in Asian countries, which will affect the restoration of stability in the already fragile Asian situation, even affect the prosperity of the world economy, and increase China's foreign debt burden. , and caused inflation to rise again, which instead brought difficulties to China's economic development. From the perspective of Sino-US trade relations, as the U.S.-China trade deficit continues to expand, if the RMB depreciates again, it will intensify trade frictions and political disputes between the two countries. It is not conducive to China's accession to the WTO.

2. From the perspective of the relationship between the mainland economy and the Hong Kong economy, stabilizing the RMB and supporting Hong Kong's economic stability are crucial to the development of my country's import and export trade, attracting foreign investment, and utilizing international financial markets. There are already tens of billions of Hong Kong dollars in circulation in mainland China, especially in South China, and there are also about 10 billion yuan in circulation in Hong Kong.

The current depreciation of currencies in neighboring countries and regions has put great pressure on the Hong Kong dollar; if the RMB depreciates further, it will seriously threaten the linked exchange rate system of the Hong Kong Special Administrative Region of China. The stability of the RMB exchange rate plays an immeasurable role in the reunification of the motherland.

The main reasons for advocating devaluation of the RMB

Although the Chinese government and most economists emphasize the need to maintain a stable RMB exchange rate, a few scholars, especially overseas and foreign scholars, advocate that the RMB exchange rate should be adjusted in due course. Moderate depreciation. The main reasons for the devaluation of the RMB can be summarized as follows:

(1) Currency depreciation is an effective means to resist economic crises

After significant currency depreciation in some countries and regions in East Asia and Southeast Asia Since the fourth quarter of 1998, most countries and regions hit hard by the financial crisis have stabilized their financial markets and their exchange rates have risen steadily (for example, the Thai baht exchange rate has rebounded from the lowest of 57:1 to the US dollar and stabilized at 30:1. The level of around the U.S. dollar, South Korea's lowest level exceeded 2000:1 U.S. dollar, and rose to the level of 1150:1 U.S. dollar); the stock market began to rebound, and has been rising since this year. Among the five major stock markets in Asia, Hong Kong, Singapore and South Korea have all exceeded At pre-crisis levels, the Japanese and Thai stock markets have also reached their highest levels in more than a year; interest rates have been generally lowered (for example, Thailand dropped from 22% to 9.2%, and South Korea dropped from about 16% to 8.6%); currency depreciation stimulated export growth , restraining the increase in imports. These have contributed to a substantial increase in their foreign exchange reserves and a significant improvement in their international balance of payments (for example, South Korea was less than 4 billion US dollars at the end of 1997, reached 44 billion US dollars at the end of 1998, and further increased to 56.4 billion US dollars at the end of April this year); public confidence was restored, and international funds began to Reflux.

All these indicate that the Asian financial crisis has been effectively controlled. So far, the economic recession in most countries and regions has reached the bottom, the recovery process is significantly accelerating, and the overall economic situation in the region has improved significantly. In the first quarter of this year, South Korea's economy achieved a growth of 4.6% after five quarters; Japan's economy also rebounded to a positive growth of 1.9%, driven by government investment; although Hong Kong's economy still fell by 3.4%, the recession was The amplitude has also been significantly narrowed. According to estimates from the Asian Development Bank, except for Hong Kong, the economies of other countries and regions are likely to achieve positive growth in 1999. The latest report released by the Japan Economic Planning Agency states that Asia's overall economy is expected to achieve a growth rate of 4.4% in 1999, much higher than last year's 2.6% growth rate, and the pace of economic recovery is accelerating.

(2) China has paid a high price to maintain currency stability

The Chinese government has promised that the RMB will not depreciate and has made great efforts and a high price to do so. The measures to stabilize the exchange rate include: (1) increasing foreign exchange management; (2) using credit policies and interest rate policies to vigorously support foreign trade enterprises in adjusting their structures, reducing costs, and expanding exports; (3) in accordance with international practice, increasing investment in textiles, coal , cement, machinery, ships and other export products; (4) exempt from import value-added tax, encourage the import of advanced equipment and technology, encourage foreign investors to invest in China; (5) appropriately control the total amount and structure of foreign debt.

What should be more noted is the "J" effect of foreign currency depreciation, that is, the lagging effect of currency depreciation will continue to appear, which will put greater pressure on China's exports in the future. The similarity of export products between my country and Southeast Asian countries reaches 40%. Although this region is an important traditional export market for my country and its economic recovery is conducive to the recovery growth of my country's exports, the depreciation of its currency and the economic The recovery has also greatly enhanced the export capabilities of these countries, making competition with my country in other markets more intense. Relevant data show that since 1999, container shipping volume from East and Southeast Asia to the United States has increased rapidly, and container explosions and container dumping have occurred frequently, and transportation prices have increased by more than 10% as a result. In May, Singapore's exports increased by 15.5%, Taiwan Province by 13.7%, the Philippines by 13.6%, Malaysia by 13.0%, South Korea by 12.8%, Thailand by 8.6%, Indonesia by 5.3%, and India by With an increase of 6.5%, the momentum of these export expansions is quite strong.

The rapid growth of China's foreign trade exports since the second half of 1999 is directly related to the country's strong support in credit, tax rebates, export management and other aspects, in addition to the improvement of the external environment. In order to realize export tax rebates, the central and local finances bear greater pressure. If things continue like this, it will not be conducive to the completion of other more urgent functions of finance, such as supporting social security, employment, education, state-owned enterprise reform, etc.

(3) The devaluation of the RMB will help alleviate some domestic problems

The history of international economic development in recent decades shows that developing countries have experienced a relatively long period of rapid growth. In the future, commodity consumption conditions, consumption environment and the intrinsic quality of commodities will be significantly improved, thus the purchasing power of currency will increase, and the exchange rate will continue to strengthen or rise. But at the same time, there may also be another problem, that is, an overestimation of the currency value due to an excessive rise in the exchange rate, leading to a series of imbalances in international and domestic economic, trade and finance, causing various problems, and then triggering a currency crisis.

Currency crisis is very destructive, but its essence is that when a country's currency appreciates excessively for a long time, the market spontaneously corrects the unbalanced currency exchange rate. So far, countries such as Mexico, Thailand, Japan, South Korea, and the Philippines that have experienced significant currency depreciation and financial crises have all experienced a cumulative process of currency overvaluation.

From the actual market environment analysis, China's internal economic conditions require the devaluation of the RMB. These factors include deflation, unemployment, problem bank loans, etc. On the one hand, currency depreciation can narrow the gap between the continuously lowered RMB interest rates and US dollar interest rates, while stimulating the rapid development of the export sector; on the other hand, it can resist the impact of foreign goods on the domestic market and fundamentally eliminate the smuggling problem. These will help improve China's current deflationary environment.

Judging from the timing of policy operations, the impact of RMB depreciation on the currencies of surrounding areas will not be too great. As the Southeast Asian economy gradually recovers, the timing of RMB depreciation is getting better and better. In 1997/98, China withstood the Asian economic crisis without devaluing the RMB. Nowadays, the Asian economy has improved significantly, but China's domestic economic development is increasingly slowing down. China should take corresponding actions in terms of currency exchange rates after weighing its own interests.

(4) RMB depreciation is conducive to improving the foreign exchange management system and depreciation expectations

The RMB should depreciate when it is time to depreciate. First of all, the RMB exchange rate depends on the supply and demand situation in the foreign exchange market, and our country should implement a floating exchange rate management system. In the foreign exchange market, when the supply of RMB exceeds demand, the RMB exchange rate should fall. If the RMB exchange rate is kept artificially unchanged, it will affect my country's market-oriented exchange rate system and keep the RMB exchange rate at the official exchange rate. Secondly, exchange rate is an important part of the market mechanism. When adverse changes occur in the balance of payments, it will adjust the balance of payments on its own. If the RMB exchange rate is kept artificially unchanged, it will be tantamount to abandoning the exchange rate adjustment mechanism, which will directly have a negative impact on domestic economic development. Under the conditions of simultaneous increases in foreign exchange reserves and tax revenue in 1999, consideration should be given to relaxing the restrictions on the floating range of the RMB so that the currency exchange rate can gradually be determined by market supply and demand.

For a considerable number of investors, whether it is the commitment of Chinese government leaders or the research results of experts and scholars, the current situation is basically "holding the currency (USD) and waiting for the (RMB) to depreciate." There are relatively few investors who continue to "enter the market" with a positive attitude. This means that the actual effect achieved by my country's implementation of the non-depreciation policy of the RMB is likely to be much lower than our expectations. In other words, even if the RMB does depreciate, the adverse effects may not be as serious as we think.