ECONOMIC VIEW:

Should China revalue the yuan?

(2 January 2004)

By Mike Ng

China, the world’s 6th largest economy, has been under pressure about its foreign-exchange policy, especially from the United States. China’s supposedly undervalued currency, the yuan or Renminbi (RMB), which some business groups claim is a major problem for American companies. President George W. Bush’s officials even described China as a ‘strategic competitor’ in the first few months in office.

At the moment, China has a fixed exchange rate of US$1 = RMB8.3. Should China revalue the yuan? Some economists think so because of China’s high export growth, with huge trade surpluses and foreign exchange reserves. But is trade deficits and losses of manufacturing jobs in the US something to do with the yuan? Now, let us look at some reassuring counter-arguments.

(1). Since the Asian Financial Crisis 1997-98, eight economies have experienced economic downturns. All of them have devalued their currencies against the US dollar, except Hong Kong. At the same time, China has managed to maintain the stability of the yuan. Relatively, China has already revalued the yuan. Table 1 shows the currency movements of these economies.

Table 1 Currency Exchange Rates
1 USD / Currency	01/07/1997	02/07/1997	02/07/1998	02/07/1999	02/07/2000	02/07/2001	02/07/2002	02/07/2003
Chinese Yuan	8.29	8.29	8.27	8.27	8.27	8.27	8.28	8.28
HK Dollar	7.74	7.74	7.74	7.75	7.79	7.80	7.80	7.80
Indonesian Rupiah	2,433	2,435	14,700	6,850	8,775	11,400	8,723.6	8,375.9
Malaysian Ringgit	2.52	2.52	4.15	3.80	3.80	3.80	3.80	3.80
Philippine Peso	26.38	26.38	41.34	38.15	43.35	52.55	50.42	53.48
Singapore Dollar	1.43	1.43	1.68	1.69	1.72	1.82	1.76	1.75
S.Korean Won	888.2	888	1,370	1,164.1	1,115.15	1,303	1,201.1	1,205.7
Taiwan Dollar	27.82	27.84	34.29	32.28	30.8	34.48	33.54	34.65
Thai Baht	24.8	29.25	42	36.95	39.22	45.38	41.63	42

Source: Economist.com

N.B. The Asian financial crisis is generally considered to have started on 2 July 1997, with the devaluation of the Thai baht.

(2). According to Professor Paul Krugman of Princeton University, even if the Chinese did accede to US demands to increase the value of the yuan, it would not have much effect unless it was a huge revaluation. And China will not agree to a huge revaluation because its huge trade surplus with the US is largely offset by trade deficits with other countries. Dr. Alan Greenspan, Chairman of the US Federal Reserve, also claims that a revaluation of China’s currency would have little effect on US employment but an artificially low exchange could cause instability in China.

(3). The latest figures from the World Trade Organisation (WTO) show that the US was the world’s top exporter in 2002, with a share of 10.8% of the world exports, whereas China was only ranked the 5th place in the same year and shared 5.1% of the world exports. On the other hand, China (including Hong Kong) already imports more from the rest of Asia than does Japan. Furthermore, China’s trade surplus as a percentage of gross domestic product (GDP) has declined every year since 1997.

(4). China is still a developing country and the yuan is still not fully convertible in the international money market. A free floating exchange rate cannot happen without drastic reform of the banking and financial system.

After all, a stable yuan is beneficial to China and the rest of Asia, as stated by the Chinese leaders. My personal view is that China should maintain a fixed exchange-rate policy in the next 10-15 years.