An Alternate Plan: The Central Government Should Not Devalue the RMB

An Alternate Plan: The Central Government Should Not Devalue the RMB
Dec 23, 2015 By eChinacities.com

Editor’s Note: The IMF recently accepted the RMB into its elite list of reserve currencies. Now, Beijing faces pressure to broaden its market for the RMB, and increase transparency and financial reforms. A Hong Kong economic professor warns the central government against devaluing the RMB against the dollar to protect trade interests. This kind of devaluation would be against the wishes of the IMF. The author gives other solutions to combat the strength of the dollar, including spreading the use of the RMB as a stable currency to Central Asia.

The RMB is under pressure because of the strong US dollar. The dollar has grown stronger against other currencies, and the RMB has not depreciated against it. The US does not rely on exports, while China still does. The appreciation of the RMB means higher domestic production costs which will hurt China’s exports.

Will the RMB be Devalued?
Many expect that the RMB will be devalued against the strong dollar. Domestic and foreign media have predicted a devaluation of the RMB. This prediction comes from the realities of the market. Because of rumors of devaluation leading to uncertainty about the currency, the currency may actual devalue in reality. The RMB was previously approved by the IMF on November 30 for inclusion in the Special Drawing Right (SDR) currency basket. Before this, the People’s Bank of China manipulated the RMB so that it would depreciate in value.

The key factor is not the potential decline of Chinese exports, but the devaluation of the RMB’s impact on net exports and trade surplus. This January to October, China’s foreign trade surplus was $485.9 billion. The country’s annual trade surplus is $600 billion, $200 billion more in 2013. In 2014, China’s trade surplus was 6%. What will happen when the RMB depreciates?

Another key is capital outflow. China’s foreign investments are current larger than foreign investment in China, however the difference is not very large. However, the numbers given aren’t entirely correct. The balance of payment shows a number of errors and overlooked items (including illegal transactions like money laundering). These “overlooked” items totaled $600 billion, almost double the amount from the previous year.

Recession in Emerging Markets
This is discrepancy the main source of downward pressure on the RMB. The past six months, the Chinese government has cracked down on money laundering, illegal foreign exchanges in Hong Kong and Macau, and recovered almost a billion Yuan. The amount of money overlooked or lost in the fourth quarter, should therefore be reduced and China’s overall balance of payments will be restored.

Therefore, devaluation will not come from market forces, but from the result of administrative policies at the People’s Bank of China. In August of this year, the bank’s devaluation of the RMB attracted an enormous international reaction. However, this time, I believe that the central government will not go against the recommendations of the IMF.

If the RMB does not devalue, and the dollar rises, China could help lessen the financial crisis in emerging markets. A recession in emerging markets would have both direct and indirect impacts on China’s trade and production. In this case, perhaps China will employ the same strategy that Vietnam did in 2008, to protect Asia. China would spend more in emerging markets in order to deflect the damage done by the strong dollar. This method would force the dollar to devalue by reducing the demand for dollars on the international market.

Steps to Strengthen the RMB
The first step for China is to join forces with Russia and sell all of its dollars, especially Chinese government and corporate bonds held in the United States. China holds about one trillion dollars in assets in the United States. If China sells its US bonds, it will either set an example for others or cause a panic. In either case, maybe other regions and countries that hold large reserves in the US, including Japan, Saudi Arabia, Switzerland, South Korea, Taiwan, and Hong Kong will follow. This would be sufficient to scare US investors in as well, and trigger the speculative selling of US dollars. 

The second step would be to accelerate the pace of the internationalization of the RMB. China should aim for the RMB to be used more in Central Asian nations. China offers a relatively large exchange limit for the RMB.  Nations in economic crisis in Central Asia can then rely on the RMB and Chinese goods to weather the storm. Then the RMB can be used between different countries and in trade with China. If Iran and Russia are pulled in, the RMB can become a stable local currency in Central Asia and eliminate the impact of the strong dollar on the region. This would also help internationalize the RMB in Africa and Eastern Europe. In this process, the RMB would need to maintain a stable exchange rate no matter how much the dollar rises.

This would establish an economic circle for the RMB similar to that of the British pound in the past. The difference is when the British pound shrank, the pound’s economic sphere of influence went on the defensive. The RMB’s economic sphere of influence will go on the attack to combat the strength of the dollar.

The RMB only has an advantage as a global currency if it remains stable. If the RMB stays stable, the illusion of the dollar’s strength will soon wear out. Then, the dollar will be reduced to its actual value in the economy.

Source: DW News

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Keywords: Chinese RMB RMB devaluation

2 Comments

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bill8899

Right. Seems like they're walking it down about 1% to 2% per month after the big August experiment. For how many months? hahaha

Dec 27, 2015 20:04 Report Abuse

bill8899

So are they devaluing it, or not?

Dec 24, 2015 10:55 Report Abuse