Stronger RMB does not mean unilateral revaluation

By Ding Zhijie (People's Daily)

17:06, August 22, 2011

Edited and Translated by People's Daily Online

A stronger RMB will exert a profound and far-reaching influence on the structure of the Chinese economy. It can promote the development of non-tradable sectors like the service industry and boost the upgrading of tradable sectors, bringing both pressure and impetus for China's economic restructuring. 

The RMB has continued to rise against the U.S. dollar recently, which is normal market behavior. It is a reasonable reflection of supply and demand and a result of the relatively weak performance of major world currencies. The RMB's recent uncommon rise against multiple major currencies has shown the flexibility of its exchange rate formation mechanism. This flexible mechanism can present China’s economic changes in a timely fashion, and it is able to withstand pressure from foreign countries. 

Previously, fears over speculative inflows of hot money hindered China's RMB exchange rate reform. As most international investors are now busy dealing with the U.S. and European debt crises, China should grasp the opportunity to accelerate the exchange rate reform. 

The RMB will be a strong currency in the medium and long-term future. Internationally, as developed countries cannot address the issues of decelerated economic recovery, slower economic growth and sovereign debt crisis in the near future, they will have to adopt relatively relaxed monetary policies. 

Domestically, China's economy will continue to maintain stable and relatively rapid growth, and the top priority of its macroeconomic regulation policies is to curb inflation. China's balance of payments has come to be balanced, yet it will not turn negative. China's comprehensive strength and international economic status is on the continuous rise. 

These fundamentals will support the RMB's appreciation. A strong currency is not equal to its unilateral appreciation. Following the end of the exchange rate adjustments, the RMB's exchange rate will have two-way fluctuations basically based on the law of supply and demand in the market. The RMB's exchange rate against the U.S. dollar is being followed closely by market actors, and if the trend for the depreciation of the U.S. dollar reverses in the international foreign exchange market, the RMB's depreciation against the U.S. dollar will be possible.

The effects brought by exchange rate fluctuations should be regarded correctly and comprehensively. Effects brought by exchange rate fluctuations are both positive and negative. For certain parts of the economy, they may be positive and for other parts, they may be negative. Therefore, we should evaluate them in a comprehensive way. 

Generally, if exchange rate fluctuations could reflect the overall economic situation and market supply-and-demand relation, they are necessary and reasonable whether the exchange rate rises or declines. But the man-manipulated exchange rate distortion is usually a root cause of economic imbalance.

Since 2005, China has carried out the RMB exchange rate mechanism reform two times and successfully adjusted the RMB exchange rate to an equilibrium level. The strong RMB will have long-term effects on the structure and trend of China's economy, promote the development of the service sector and other non-tradable sectors and accelerate the transition and upgrade of the tradable sector. 

It is both a pressure and impetus for the structural adjustment of China's economy and could help the enterprises "go global." Meanwhile, RMB exchange rate fluctuations will be normal things in the future, and therefore China should actively deal with and control the risks of its international trade activities caused by RMB exchange rate fluctuations.

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