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China reaffirms market-oriented RMB exchange rate reform

The Financial Research Institute of the People's Bank of China released a report titled "Review and Outlook on the Reform of the RMB Exchange Rate Formation Mechanism" on Oct. 12, 2011, in which it used data and facts to refute the unfounded allegations of the United States about China's supposed manipulation of exchange rates and substantial undervaluation of the RMB.


According to the report, the RMB exchange rate appreciated by about 37 percent from the start of the RMB exchange rate reform in 1994 to the end of September 2011. Data released by the Bank for International Settlement shows that the nominal and real exchange rates of the RMB against currencies of China's major trade partners were up about 33 percent and 59 percent, respectively, as of the end of August 2011. Among the 58 types of currencies monitored by the Bank for International Settlement, the appreciation of the nominal and real exchange rates of the RMB ranked 13th and 10th, respectively.


Meanwhile, the U.S. dollar index depreciated 36 percent from January 1971 to September 2011, but the trade deficits of the United Stateshave yet to improve. If theUnited Statesseeks to change its international balance of payment through currency depreciation instead of the adjustments to its macroeconomic policy and structure, it will surely fail. TheUnited Stateshas focused on the RMB exchange rate issue in order to find a cover for its internal shortcomings and politicize economic issues, which will fail to solve its domestic economic problems and also severely damper the economic and trade ties betweenChinaand theUnited Statesand undermine the global economic recovery.


The report said that the RMB appreciation would neither resolve the issue of trade imbalance betweenChinaand theUnited Statesnor address the unemployment in theUnited States.


First, theUnited States' trade imbalance of this round is the extension of its previous imbalance. If theUnited Statesdoes not adjust its macroeconomic policies and structure but only tries to change its international balance of payments by adjusting the exchange rate, it will not succeed.


Second, the trade imbalance betweenChinaand theUnited Statesreflects the transfer effect of the trade surplus. From 2005 to 2010,China's total regular trade surplus was a little less than 272 billion U.S. dollars and total processing trade surplus was 1.46 trillion U.S. dollars. Particularly,Chinatook over the final processing and assembling chain of the industrial transfers from Europe,United States,Japanand countries of theSoutheast Asia.Chinaimported a large part of the semi-finished products from other countries but not from theUnited States, andChinagot only a small processing fee from the whole industrial chain.


Third, theUnited Stateshas reaped much practical benefit from the free trade betweenChinaand theUnited States. According to an investigation carried out in 2008 by the American Chamber of Commerce inChinaon 238U.S.enterprises inChina, 71 percent of them had margins higher than the global average level, and 80 percent of them were preparing to increase their investments.


According to a report by Morgan Stanley, due to China's export to the United States, U.S. consumers save 100 billion U.S. dollars per year and U.S. enterprises obtain a profit of 600 billion U.S. dollars per year, accounting for more than 10 percent of the total profit of all the U.S. enterprises included in the Standard and Poor's Composite Index.


Fourth,U.S.export restrictions are a major reason for its trade deficit withChina. TheUnited Statessticks to the Cold War mentality and has imposed various restrictions on exports of high-tech products toChinain the name of safety. Gary Locke, formerU.S.commerce secretary, once said that increasing instead of restricting exports toChinais the best way for theUnited Statesto tackle its trade deficit.


A consistent goal ofChina's RMB exchange rate reform is to let market forces play an increasing role in exchange rate formation. The central bank noted in the report that China has realized the importance and urgency of achieving a balanced trade structure and will continue to steadily carry out the RMB exchange rate reform, increase the flexibility of the RMB's exchange rate and give full play to role of exchange rate in adjusting its balance of payments.


However, the exchange rate reform is no solution to all problems.Chinahas carried out the reform in an active, controllable, and gradual way, in order to make the best use of the situation, to minimize its potential negative impact on the Chinese and world economies and to buy time for a set of structural adjustments and related reforms in the future.


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