What if RMB depreciates?

What if RMB depreciates?
Mar 5, 2008 01:03
guestYuan	Since the foreign exchange rate reform policy was adopted, RMB has been appreciating very fast. Right now, RMB’s exchange rate against dollar has reached 7.1172 : 1. But EU and US still seem to be unsatisfied with this. In their opinion, RMB should keep appreciating faster. However, should RMB appreciate? What does China benefit from RMB appreciation? A person suggested in his article that RMB should depreciate instead of appreciating. In his view, China hasn’t benefited much from RMB appreciation. On contrary, it has brought huge losses. The following is his argument: First, RMB appreciation is bad for foreign exchange reserve. At present, China holds 1.53 trillion dollars foreign exchange. If RMB continues to appreciate, the foreign exchange reserve will decline. With RMB appreciating by 1 percent, China will lose about 100 billion yuan. Second, Chinese export companies face harsh challenges with US economy declining. The cost increases but the demand decreases. RMB appreciation seems to add fuel to the fire. Especially, those small and medium-sized export companies suffer a big blow from it. Third, RMB appreciation escalates the inflation in China. With RMB appreciating, more hot money from abroad is transferred to China and then excess liquidity is caused. Finally, inflation occurs. What do you think of his argument, reasonable or not? Do you agree that RMB should depreciate?

Mar 5, 2008 01:03

guestYuan

Since the foreign exchange rate reform policy was adopted, RMB has been appreciating very fast. Right now, RMB’s exchange rate against dollar has reached 7.1172 : 1. But EU and US still seem to be unsatisfied with this. In their opinion, RMB should keep appreciating faster. However, should RMB appreciate? What does China benefit from RMB appreciation?

A person suggested in his article that RMB should depreciate instead of appreciating. In his view, China hasn’t benefited much from RMB appreciation. On contrary, it has brought huge losses. The following is his argument:

First, RMB appreciation is bad for foreign exchange reserve. At present, China holds 1.53 trillion dollars foreign exchange. If RMB continues to appreciate, the foreign exchange reserve will decline. With RMB appreciating by 1 percent, China will lose about 100 billion yuan.

Second, Chinese export companies face harsh challenges with US economy declining. The cost increases but the demand decreases. RMB appreciation seems to add fuel to the fire. Especially, those small and medium-sized export companies suffer a big blow from it.

Third, RMB appreciation escalates the inflation in China. With RMB appreciating, more hot money from abroad is transferred to China and then excess liquidity is caused. Finally, inflation occurs.

What do you think of his argument, reasonable or not? Do you agree that RMB should depreciate?

Mar 14, 2008 03:03

BARONTWANGLE
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Join Date: Nov 7, 2007
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Personally, I want to see the RMB decrease in value, but that is for selfish reasons (all my money is in UK £'s!). Last December the exchange rate was 15.3, but recently it has been as low as 13.9. That's a huge % difference, and makes a noticeable change every time I withdraw money from an ATM. However, putting my own affairs aside, as China exports more than it imports, then surely by devaluing the RMB it is raising the relative price of its exports from the foreign buyers perspective. The buyers use China purely because it is the cheapest place to get things developed and manufactured. If that yuan strengthens, then the appeal is gone, and other developing countries such as India will be waiting in the wings to snatch the business. I am not an economist, but I can't see the sense of devaluing the RMB, other than to satisfy the politicians of other envious countries. The last thing China wants to be doing is trying to satisfy the US. The favour will never be returned.

Mar 14, 2008 19:08

MARRIE
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Join Date: Jan 7, 2008
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I am not an economist either.

Relative advantages make trade possible. US is more productive and efficient in manufacturing than China but why they are still outsourcing manufacturing and high tech industry, specifically programming contracts? That is because capitalism is to max. profit and min. cost. The fact that China, my opinion, is expanding overseas investment implies china wants to minimize the loss in foreign reserves in u$ due to the increasing probability of rmb appreciation.

Less demands from US economic downturn and rmb appreciation from outside pressure threat china’s export. I don’t think Chinese people want rmb appreciate instantly because they are going to lose jobs.

export subisdy or manipulating u$ value in currency market are better way to keep rmb from appreciating then lowering interest rate and further cutting labor costs.

Mar 17, 2008 22:24

JIMMYB
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Join Date: Feb 7, 2007
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Baron, perhaps Chinese government should make compensation to you (just kidding!). But EU and US don't think so. Although RMB is appreciating very fast, they are still dissatisfied with the results. They expect quicker appreciation.

Marrie is right. Chinese governement and its people are reluctant to appreciate RMB too quickly because the exports will be decreased and more people are going to lose their jobs.

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