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Opinion: Growing merits of yuan appreciation

10:39, April 13, 2011      

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Two different schools of opinion-leaders are debating the speed of liberalizing China's currency exchange rates with major global currencies. One advocates "more haste, less speed", meaning any quickening of the process will destabilize the country's financial system and might lead to a crisis. The other believes the exchange-rate-system reform "should be expedited" and now, "the time for action has arrived".

French President Nicolas Sarkozy, this year's rotating president of G20 – an organization set up in the economic bloodbath of 2008-09 Great Recession to chart a new roadmap for overhauling problematic international monetary system, has recently echoed U.S. Treasury Secretary Timothy Geithner, recommending a faster liberalization of China's yuan as a new global currency.

Some academics have embraced the idea. They say that, with proper planning, there is a good chance the yuan, also called Renminbi, can achieve conditional, free convertibility in three to five years.

But obviously, the policy-makers in Beijing are conscious of the narrow profit margins among China's exporting manufacturers, and have consistently decided to proceed gingerly with currency appreciation for fear of widespread factory closures, unemployment and possible unrest.

If I were the central bank, I would reckon the pros and cons of the two schools, and probably, take a middle ground. There is no problem with Beijing's well-known exchange-rate reform policy, centering on the need for a gradual, progressive while controllable approach. But, I would opt for a little more aggressiveness in proceeding the reform, while wouldn't target at free convertibility in barely three to five years. I would rather draw a longer timeframe, say, in 10 years.

Many object to the word "controllable" in the policy guidebook, arguing it is a strong appendix of the planning-economy era. However, the very word also speaks of Chinese people's nature and code. The stakes are high if we scrap it and stand for everything "that is free-wheeling".

After the 2008 sub-prime mortgage meltdown in the United States, which caused the global financial system crisis, many in the West have exposed the ills of the Wall Street 's "free-wheeling" conduct of securitizing exotic bonds, and President Obama has opted for stricter financial regulation. In Asia, George Soros and other hedge fund managers dumped Thai equities, which they had accumulated, freely, and immediately touched off the 1997-98 Asia financial crisis, wrecking economies of many Asian countries and regions.

In China, a rumor, just three weeks ago, alleged iodized salt was able to block the assault of Japanese nuclear radiation. We all knew the aftermath. People emptied grocery shelves of salt, seafood and, even bizarrely, soy sauce. Someone in far-away Northwest China hoarded one ton salt. Who knows the result if the yuan becomes freely convertible, and suddenly, a rumor goes that British pound will skyrocket in value because of a splendid Olympic Games? Grandpas and grandmas are to haunt banks at midnight, and the yuan is destined for a sink.

Beijing's sober mind in accelerating currency reform is therefore understandable, for any rush to liberation will have unfathomable impacts, which may cripple, if not topple, the boat that has been sailing at a fairly rapid speed since 1978.

The top leadership, together with the majority of the country's population, believes that stability – controllability in the eyes of the policymakers – ensures security and speed of China's economy. No one is willing to abandon it, for the potential financial volatility (on China's stock market) and systematic risks (to China's banks), to be caused by hastened currency liberalization, remain a mystery.But, within the broad safety frame of controllability, Beijing could choose to appreciate its currency more quickly – by a bigger magnitude if not one-off rises, to suit China's economic needs. I would list three merits of a more precipitous gain of the yuan.

First, China has faced strong headwinds of inflation now, thanks to staggering price rises of food and source materials, including oil and metal ores. Interest rate hikes are most effective to rein in inflation, and, accelerating currency appreciation also helps control it, because large quantities of imported products would become relatively inexpensive on domestic market.

Some in China are worried about the worth of the country's colossal foreign exchange reserves, which topped US$2.85 trillion last year, as the Western central banks print money to dilute their debts. Then, a more rapidly rising exchange rate of the yuan will enable China to spend less to buy U.S. dollars, euros and other currencies on the foreign-exchange market. It could also thwart the inflows of speculative "hot money" to China.

And, thirdly, gains in the yuan value make exports more difficult, which will help China intensify industrial transformation, by continuously adding pressure on low-productivity and low-knowledge assembly plants. Chinese workers will get higher levels of training, who are to throng to workshops manufacturing high-value products, or to be engaged in more home-grown innovations.


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