No appreciation to RMB!

By: Lian Shengchun

Currently there is an argument that the Chinese currency should be appreciated. Especially the Bush administration of the United States put much pressure to China-US international trade to try to persuade Chinese government to appreciate its currency. But almost all the top economists do believe such a policy opposes to 1.3 billion Chinese people乫s economy development and also harms the world economy development. According my understanding of China乫s society and economy development, the appreciation of the RMB will block China乫s economy development and in this presentation I will try to give some of my explanations.

 

The arguments from the United States ask for the RMB appreciation goes as follows:

1.       There is too great a trade imbalance between China and US trade.

2.       The United States imports too much from China because the RMB has been undervalued and makes the Chinese export more competitive.

3.       China has a great amount of foreign exchange reserves.

 

My opinion is that no change to the Chinese foreign exchange rate currently is a better choice to the Chinese economy development, as the Chinese economy is playing a economic development engine for the world now so this is also a policy good for the world, rather than an appreciation to it.

In order to explain it, we should first check some of the economy conditions:

1.       What is China乫s international trade payment balance?

2.       What is the resource of China乫s foreign exchange reserves?

3.       What乫s the economic relationship between China and U.S.?

 

First, we should take an overview of China乫s international trade balance:
Table one: trade balance since 1981

Resource: China乫s customs statistics 2005

 

Table two: Top 10 would trade countries 2004

	Top 10 would trade countries 2004
						Unit丗100Million$丆%
	Export	2004	Amount	Growth	Percentage in world	2003 range
	World Total	丂	91235	21.9	100	丂
	Among which:		丂	丂	丂	丂
	Germany	1	9148	22.2	10.0	1
	U.S.	2	8190	13.1	9.0	2
	China	3	5934	35.4	6.5	4
	Japan	4	5655	19.8	6.2	3
	France	5	4510	17.2	4.9	5
	Netherlands	6	3588	22.3	3.9	7
	Italy	7	3461	19.3	3.8	8
	U.K.	8	3456	13.7	3.8	6
	Canada	9	3220	18.3	3.5	9
	Belgium	10	3089	21.3	3.4	10
	Import	2004 range	Amount	Growth	Percentage In World	2003 Range
	World Total	丂	94583	21.8	100	丂
	Among which;	丂	丂	丂	丂	丂
	U.S.	1	15264	16.9	16.1	1
	Germany	2	7175	19.3	7.6	2
	China	3	5614	36.0	5.9	3
	France	4	4641	19.5	4.9	4
	U.K.	5	4620	19.0	4.9	5
	Japan	6	4545	18.7	4.8	6
	Italy	7	3490	20.8	3.7	7
	Netherlands	8	3199	22.5	3.4	8
	Belgium	9	2872	22.6	3.0	10
	Canada	10	2758	12.3	2.9	9

Resource: China乫s customs statistics 2005

 

 

Second, we should take an overview on the resources of China乫s foreign exchange reserves:

 

Table three: foreign exchange reserves since 1979:

Year	Year result	Year Value added	fdi	trade surplus
1983	89.0	19.2		8.4
1984	82.6	-6.8		-12.7
1985	26.4	-55.8	16.58	-149
1986	20.7	-5.7		-119.6
1987	29.2	8.5		-37.8
1988	33.7	4.5		-77.5
1989	55.5	21.8	33.92	-66
1990	110.9	55.4	34.87	87.4
1991	217.1	106.2		81.2
1992	194.4	-22.7		43.5
1993	212.0	17.6		-121.8
1994	516.2	304.2		53.9
1995	736.0	219.8	375.21	167
1996	1050.3	314.3	417.25	122.2
1997	1398.9	348.6	452.57	404.2
1998	1449.6	50.7	454.63	434.7
1999	1546.8	97.2	403.19	292.3
2000	1655.7	109.0	407.15	241.1
2001	2121.6	465.9	468.78	125.5
2002	2864.1	742.5	527.43	304.3
2003	4032.1	1168	535.05	254.7
2004	6099.1	2067	606.3	319.8

Resource: MINISTRY OF COMMERCE, P.R.China

 

 

 

 

 

 

Table four: Actual Inflow Foreign Capital of China

Actual Inflow Foreign Capital
Item: one丟  Capital: 100 Million $			丂	丂	丂	丂	丂
丂	Total		Foreign Loan		FDI		Other
Year							Investment
丂	Item	Capital	Item	Capital	Item	Capital	丂
1979-1984		171.43	丂	130.41	丂	30.60	10.42
1985		44.62		25.06		16.58	2.98
1989	丂	100.59	丂	62.86	丂	33.92	3.81
1990		102.89		65.34		34.87	2.68
1995		481.33		103.27		375.21	2.85
1996		548.04		126.69		417.25	4.10
1997		644.08		120.21		452.57	71.30
1998		585.57		110.00		454.63	20.94
1999	丂	526.59	丂	102.12	丂	403.19	21.28
2000	丂	593.56	丂	100.00	丂	407.15	86.41
2001	丂	496.72	丂	丂	丂	468.78	27.94
2002	丂	550.11	丂	丂	丂	527.43	22.68
2003	丂	561.40	丂	丂	丂	535.05	26.35
1979-2003	丂	6795.58	丂	1471.57	丂	4997.60	326.41
丂	丂	丂	丂	丂	丂	丂	丂

Resource: National Bureau of Statistics of China

 

After an examination of the above four tables, we can make an evaluation that:

1.       During the past two decades, the Chinese international trade payment is just in a condition of balance, and the trade surplus is not too much great.

2.       During the past two decades and before year 2002, almost all of the foreign exchange reserves were accumulated from international trade surplus and FDI.

3.       Since some country posed the RMB appreciation argument, the annually added foreign exchange reserves began to accumulate greatly exceeded the sum of trade surplus and FDI.

4.       So it乫s reasonable to believe that among the currently great amount Chinese foreign exchange reserves, a great part of that are international speculative capital.

According the above conclusion, we can make a conclusion about the RMB appreciation arguments:

1.       The just in balance Chinese international trade condition implies that currently an appreciation to RMB is not so urgently required.

2.       There are so much international speculative capital in China now, a current appreciation to RMB is improper and is a dangerous activity. It would make the Chinese economy exposed to financial crises.

 

 

Now we should take an overview on the China-US economic relationship:

Table five: China-US international trade factors:

Item\Year	1999	2000	2001	2002	2003	2004
CN Total trade [100 Million$]	3606.3	4742.9	5096.5	6207.7	8509.9	11547.40
Foreign firms [100 Million$]	--	2367.14	1332.36	3302.39	4721.70	6631.63
Trade with US [100 Million$]	--	--	804.85	971.81	1263.34	1696.26
US Total trade [100 Million$]	--	32006.17	29258.1	29000.4	30930.5	36253.5
Percentage in US total trade	--	--	2.75%	3.35%	4.08%	4.68%
US Deficit	--	3577.59	3391.20	4145.62	4632.29	5930.12
CN surplus from US [100 Million$]	--	--	28.08	427.2	586.1	802.7
CN-US deficit/ US Total deficit	--	--	0.8%	10.3%	12.7%	13.5%
US Investment [Million$]	4,868	1,817	1,912	924	1,540	4,721

Resource: China E-port Information Data Center; Ministry of Commerce, U.S./China

 

From data in the above table we can make an evaluation that: China just shares about 5% U.S. total international trade. And China乫s trade surplus from U.S just takes about 10% in total U.S. international trade deficit. So even if Chinese currency appreciated 25%, it could only solve no more than 3% of U.S. total trade deficit problem.

 

My conclusion about the United States乫 arguments for RMB appreciation was unreasonable and unacceptable. China乫s current foreign exchange rate system functions very well and no changes are required. The RMB appreciation issue is just a political concern to disturb China乫s prosperous and booming economy development but not an economics explanation.

 

 

Reference:

http://www.customs.gov.cn/tongjishujv/a/Page9.htm

http://www.bea.gov/bea/di/usdiacap.htm#2004

http://gcs.mofcom.gov.cn/tongji2004.shtml

http://www.stats.gov.cn/tjsj/ndsj/
http://www.chinafdi.org.cn/

http://www3.chinaport.gov.cn/shiwu/index.do?pageName=shiwu9stat9indexHgtj&type=stat0hgtj