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No Need for RMB Revaluation

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1 No Need for RMB Revaluation on Fri Apr 02, 2010 6:26 pm


UPDATED: April 2, 2010 Web Exclusive
No Need for RMB Revaluation


Recently, the pros and cons of RMB appreciation have become a hot topic worldwide. Both the Chinese and American sides have constantly voiced their views on this issue, especially after U.S. senators proposed legislation in March calling on China to appreciate its currency, the yuan. A recent article from China Business News offered some reasons why China has no pressing need to revalue the yuan, from the perspective of the current domestic economic situation. Edited excerpts follow:

Exports uncertain

Statistics from the General Administration of Customs show that China's exports in February this year reached $94.5 billion, a rise of 45.7 percent compared with the same period last year. The figure even outstripped total exports of $87.4 billion in February 2008. It seems that the country's exports have returned to where they were prior to the global financial crisis.

But some experts have pointed out that the main reason for the high growth is the low benchmark figures, since exports in February 2009 experienced the largest drop amid the global financial crisis.

Unclear prospects for demand abroad pose a major risk to foreign trade recovery. Many major economies, except for the United States, still do not show signs of full recovery. Europe, China's largest export destination, has fallen into a red ink crisis of sovereign debt headed by Greece.

The current economy in the United States, though officially out of recession, still leaves economists wary. Shi Lei, an analyst at the Bank of China, said that maintaining economic recovery in the United States remains a challenge, since income has been slow to rebound and demand is mainly supported by stock adjustment and government stimulus policies. The greatest risk therefore looms as America's policies return to normal.

China's export-oriented businesses are seeing rising product orders, the majority of them long-term, but that is no guarantee that foreign trade will continue to rebound in the third and fourth quarters.

Labor shortage

Employment is a key factor in economic recovery. But China is having a hard time finding workers. "This phenomenon may result in misjudgment of the export situation," said Lu Zhengwei, a senior economist at Industrial Bank Co. Ltd.

According to Lu, the labor shortage does not mean that foreign trade is improving. Rather, it means that the costs of export-oriented enterprises are rising, or, in other words, the yuan has appreciated so much that export enterprises are no longer able to sign contracts for orders.

Lu said that the key reasons for the labor shortage are low pay and the rising cost of living in large cities in eastern China, which discourage workers from migrating to urban areas. Even if foreign demand returned to normal, enterprises would not be able to accept more orders because it is difficult to find workers to fill them.

A report from the Bank of China said that in the short run, the recent labor shortage would play down the possibility of RMB appreciation. It has become necessary to increase wages for migrant workers, which will place a heavier burden on labor-intensive enterprises and cause their costs to rise even higher. This is another factor mitigating the possibility of RMB revaluation, the report said.

Imported inflation

The fact that China's consumer price index (CPI) rose higher in February than anticipated, along with China's zest for commodities during the recovery process, raises the question: Will China revaluate the yuan against the U.S. dollar to hedge against imported inflation?

Most analyses do not reckon that China will face great pressure from imported inflation in 2010, since global overcapacity will limit the rise in commodity prices, according to a report from China Merchant Bank.

Nie Wen, an analyst at Fortune Trust Co. Ltd., said that short-term inflation pressure will arise mainly from the huge liquidity released last year and the surge in investment early this year, not from imported inflation.

But Hu Hao, an analyst at Nanhua Futures Co. Ltd., had a different view, predicting possible pressure from imported inflation in the future. He said that international oil prices are expected to rise to $80 to $90 per barrel and will continue to their highest level in the third quarter this year, just as the United States begins its summer driving season and major economies become more secure in their recovery.

Shi said that CPI, a main gauge of inflation, might drop to around 2.3 percent in March, which does not indicate inflation pressure. But if the U.S. dollar goes down, oil prices could rise to a new high, which will increase inflation expectations.

Meanwhile, Shi pointed out that the only reason for revaluing the yuan would be to resist imported inflation caused by increasing foreign demand, which is clearly not the case.

Pressure to revalue

If there is no need to revalue the yuan under the current economic situation, then where is the pressure coming from?

The most direct reason lies in the unbalanced trade between China and the United States. Statistics from the United States in January showed that the U.S. trade deficit with China accounted for nearly 50 percent of the month's total. After that, U.S. President Barack Obama pressed for yuan revaluation.

In fact, U.S. exports are better than the world average, and the U.S. trade deficit unexpectedly narrowed to $37.3 billion in the month of January, according to Lu. Since the United States has exhausted its stimulus policies and is saddled with huge debts, it must rely on foreign demand to drive its economy toward further recovery. As a result, the yuan is being targeted.

Ding Zhijie, dean of the School of Banking and Finance at the University of International Business and Economics in Beijing, said that although the United States is pressing for RMB revaluation, that doesn't necessarily mean it wants to see dramatic appreciation or rapid reform of China's currency exchange rate mechanisms. Since China remains prudent on the yuan, the United States is using currency appreciation as a bargaining chip to make headway in other areas, such as opening the Chinese market and influencing Chinese industrial policies.

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