Editor’s note: There has been a lot of talk lately over the rising RMB and what effect this has on international trade and world economics. Some countries feel that the RMB is artificial pegged in order to benefit China in the international market. This might be true, but conversely, this has a negative effect on the domestic market. In this translated article, one journalist looks at this situation and what it means for the value of the RMB in China and abroad.

At the end of December 2013, the exchange rate of Chinese RMB to U.S. Dollars was 6.1:1. Before the reforms the took effect on July 21, 2005 regarding the exchange rate and its mechanisms, the exchange rate was 8.3 RMB:1 USD. From then till the end of last year, the RMB has appreciated 35.7% against the U.S. Dollar.

Now, when Chinese citizens travel and shop around the world, their RMB takes them further than ever before. However, for the many more Chinese citizens who have not travelled there is not this feeling of “value.” In fact many citizens feel like the RMB has become more and more “worthless.”

In the past eight years, the price of domestic goods has been steadily rising. According to statistics, while the RMB gradually appreciated in value against foreign currency, the average annual domestic Consumer Price Index (CPI) also rose 3.1%. This shows that while the RMB appreciated externally, it had actually devalued internally as domestic prices rose.

Source: nayukim

Analysis

This phenomenon of “internal depreciation and external appreciation,” was caused by two factors.

1) China adopted a “floating exchange rate,” system, in which there are strong controls on international capital flows. In this context, the system is marked by surplus domestic capital liquidity which causes inflation. This inflation devalues the RMB domestically.

2) China’s economic growth rate is still high and has always been in the surplus position in international trade, exporting more products than they import. With limited supply, the demand has continued to rise. This has caused the RMB to appreciate externally. 

How should this issue be resolved?

Through the promotion of a market-oriented exchange rate mechanism.

A few days ago, People’s Bank of China bureau chief Sheng Songcheng wrote in a commentary that the RMB must be correctly understood and the phenomenon of “internal depreciation and external appreciation” must be seen as a stage of China’s economic development.

Guo Tianyong, director of Central University of Finance and Economics’ Bank of China Research Center pointed out that the key issue lies in continuing to promote a system marked by a market-oriented exchange rate mechanism. A market-oriented exchange rate mechanism will be able to avoid uni-directional appreciation of the RMB. This system will help the RMB rise and lower in value according to the market and lessen the impacts of artificial distortions.

Forecast

In 2014, the Yuan is expected to continue rising. Bank of Communications chief economist Lian Ping believes that while a trade balance exists between China and the U.S., there is continuing pressure for the RMB to appreciate against the U.S. Dollar. In 2014, the RMB will likely continue to modestly appreciate against the U.S. Dollar and according to appreciation trends it is highly probable that the exchange rate will reach about 6 RMB to the dollar. United Overseas Bank Group investor relations and research director, Xu Zhoude, predicts that through 2014 the trend of appreciation will be modest and the RMB will slowly rise to 5.90 by the end of the year.

Source: xinhuanet.com

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Keywords: Low Value at Home High Value in Foreign Countries Rising RMB