Data from the China Foreign Exchange Trade System shows that the central parity rate of the RMB against the U.S. dollar stood at 6.3425 on Oct. 25. U.S. dollar fells 124.00 basis points and RMB-to-dollar exchange rate fell below 6.35 for the first time.
Pressure from US causes RMB appreciation expectations
Why has the RMB exchange rate continued to rise? Experts said that there are domestic and international factors.
"The recent continuous RMB appreciation is a policy choice of China's central bank after taking into account the domestic and international situation," Gao Jie, assistant professor of the School of Banking and Finance under the University of International Business and Economics, said.
Foreign exchange policy is a policy tool of the central bank to regulate the macro economy and RMB appreciation can help phase out backward production facilities to adjust China's industry structure. Moreover, RMB appreciation can help ease domestic inflation.
Yan Xiaona, vice director of the Research Center for International Finance and Economics under the Chinese Academy of Social Sciences, said that China’s economy has maintained faster and sounder growth than that of other emerging countries and the United States or Europe facing financial or debt crises, which is a fundamental economic factor behind RMB appreciation.
The international factors can mostly be boiled down to pressure from the United States. Yan said that the recent RMB appreciation pressure from the United States has resulted in appreciation expectations that are the primary cause behind the recent new highs of the RMB exchange rate.
Essentially, the U.S. dollar is on the top of the pyramid of the international monetary system and has the power to transfer the U.S responsibility to adjust its current account deficit to other countries, the most basic means of which is to force its trade partners to raise the valuations of their currencies.
The rapid growth in China's foreign exchange reserves is another contributing factor to the appreciation of the RMB. Yan said that along with the gradual appreciation of the RMB, China's current account surplus has dropped significantly, but the country's foreign exchange reserves have continued to grow rapidly over the past two years.
In addition to the factors of population and culture, China's rapidly expanding foreign exchange reserves are closely related to its active efforts to promote RMB internationalization as well as cross-border RMB trade settlement services. Major developed economies have kept their interest rates at low levels for some time, placing China under great pressure from arbitrage capital inflows.
China to stop RMB's unilateral appreciation
Experts agree that the RMB exchange rate will continue to rise. Yan said that the RMB has appreciated over 30 percent against the U.S. dollar since July 2005 and will obviously continue to appreciate for some time to come if there are not any new major financial crises.
Fudan University previously predicted in an analysis report that in the fourth quarter, the RMB exchange rate will continue to rise and may hit record high since the launch of the exchange rate reform.
Certain industry insiders noted that the RMB exchange rate is likely to rise only slightly rather than sharply. Gao believes that the RMB exchange rate is near the equilibrium exchange rate and is facing depreciation pressure due to domestic inflation.
In the future, the RMB will turn from unilateral appreciation to two-way floating, which is in accordance with market rules. Currently, China is actively moving toward a floating exchange rate regime by deepening the reform of the RMB exchange rate formation mechanism.
Nomura Securities also believes that as the pressure of inflation is decreasing, the RMB appreciation steps are slowing down too.
Overly rapid depreciation harmful
If the RMB appreciates too rapidly, it will bring more disadvantages than advantages. Experts said that RMB appreciation will affect China's foreign trade, foreign investment attractiveness, domestic employment, price levels and the steady development of financial reform. It will affect the comprehensive competitiveness of many industries of China too.
Yan believes that exchange rate appreciation means not only the adjustment of the relative price of two countries' currencies but also the adjustment of relative price of one country's trade product sector and non-trade product sector.
Therefore, if the RMB appreciates too rapidly and the country's trade product industries are not adjusted timely and properly, the trade product industries will inevitably be impacted. Meanwhile, if the RMB appreciates too rapidly, China's U.S. dollar assets will suffer losses too. In addition, the exchange rate fluctuation brought by rapid RMB appreciation will affect China's RMB internationalization course and decrease foreign importers' desire to use the RMB to settle accounts.
Gao said that an overly rapid RMB appreciation will increase the export costs of the foreign trade enterprises caused by exchange rate factors. If the punitive tariff is added in, the export enterprises will face double pressures and their bankruptcies will accelerate. That will be very bad for the social stability of China. On the other hand, in the event that bulk product prices increase rapidly, imported inflation will become inevitable.
People working in first-line cities are facing various pressures, but the second and third-line cities are also not paradises. Many people already do not know how to adapt themselves.