Transcript China’s exchange rate policy

China’s exchange rate policy
Pierre Jacquet
French Development Agency (AFD)
Panel discussion organized by Citigroup
Dubai, September 21, 2003
Outline
• Context of the debate
• Is the yuan undervalued ?
• Short term and longer term prospects
Y uan nominal exchange rate v is-à-v is the dollar and the euro
14
Number of yuans per dollar or per euro
14
China:E xchange rate; Y uan/US $; Monthly average;
China:E xchange rate; yuan/E uro; Monthly average;
12
12
10
10
8
8
6
6
4
4
2
2
0
0
70
72
74
76
78
Source : FERI Databanks
80
82
84
86
88
90
92
94
96
98
00
02
Real ef f ectiv e exchange rate of the Y uan
450
160
China, P . R.: Mainland:RE E R B A S E D ON RE L.CP ; INDE X NUMB E R;;
United S tates:RE E R B A S E D ON RE L.CP ; INDE X NUMB E R;;
E uro A rea:RE E R B A S E D ON RE L.CP ; INDE X NUMB E R;;
400
150
140
350
130
300
120
250
110
200
100
150
90
100
80
50
70
80
82
84
86
88
Source : International Monetary Fund
90
92
94
96
98
00
02
Context of the debate
• Combination of China ’s WTO accession and of an
impressive economic dynamism and export growth : China
is feard as a disruptive competitor worldwide and in Asia.
• Increasing concern, notably in the United States, but also
echoed in Europe, about a surge in imports from China and
about the reluctance of the Chinese authorities to let the
yuan appreciate
• Pressures from the manufacturing sector in the US
especially, but also in Japan and Europe.
Big Mac PPP
(Source : The Economist, 24/04/2003)
Local
currency
price (2)
USD
price
(3)
USD
PPP
(4)
Actual
exchange
rate (5)
Over (+) or
under (-)
evaluation (%)
United States
$ 2.71
2.71
UK
£ 1.99
3.14
1.36*
1.58
+ 16
Eurozone
€ 2.71
2.97
1.00*
1.10
+ 10
Argentina
Peso 4.10
1.43
1.51
2.88
- 47
Zl 6.3
1.62
2.32
3.89
- 40
Thailand
Baht 59.0
1.38
21.8
42.7
- 49
China
Yuan 9.9
1.20
3.65
8.28
- 56
Japan
Yen 262
2.19
96.7
120
- 19
Poland
Nota : except for the £ et the euro (€) whose exchange rate represents their value in dollars (indicated by a star *),
column 5 gives the dollar value of the local currency. Column 3 results from dividing (2) by (5). Column 4 (dollar PPP)
results from dividing (2) (local curreny price of the Big Mac) by 2,54 (US price of the Big Mac) (except for the UK and the
euro zone, where the reverse ratio is taken). Source : http://www.economist.com
China's exports
40.000
USD Millions
40.000
China, P . R.: Mainland:E X P ORTS , FOB ,E X P ORTS TO W ORLD; MILLIONS OF US $;;
China, P . R.: Mainland:E X P ORTS , FOB ,E X P ORTS TO UNITE D S TA TE S ; MILLIONS OF US $;;
China, P . R.: Mainland:E X P ORTS , FOB ,E X P ORTS TO E UROP E A N UNION; MILLIONS OF US $;;
35.000
35.000
30.000
30.000
25.000
25.000
20.000
20.000
15.000
15.000
10.000
10.000
5.000
5.000
0
0
80
82
84
Source : FERI Databanks
86
88
90
92
94
96
98
00
02
China's imports
7.000
USD Millions
7.000
6.000
6.000
China, P . R.: Mainland:IMP ORTS , CIF,IMP ORTS FROM UNITE D S TA TE S ; MILLIONS OF US $;;
China, P . R.: Mainland:IMP ORTS , CIF,IMP ORTS FROM JA P A N; MILLIONS OF US $;;
5.000
5.000
China, P . R.: Mainland:IMP ORTS , CIF,IMP ORTS FROM E UROP E A N UNION; MILLIONS OF US $;;
4.000
4.000
3.000
3.000
2.000
2.000
1.000
1.000
0
0
80
82
84
Source : Feri Databanks
86
88
90
92
94
96
98
00
02
China's current account balance
5
% GDP
5
China:Current account; B alance; % of nominal GNP ;
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
82
84
86
88
Source : International Monetary Fund
90
92
94
96
98
00
-4
02
Foreign Direct and Portf olio Inv estment : Inf lows
60.000
60.000
China, P . R.: Mainland:DIR. INV E S T. IN RE P . E CON., N.I.E .; MILLIONS OF US $;;
China, P . R.: Mainland:P ORTFOLIO INV E S TME NT LIA B ., N.I.E .; MILLIONS OF US $;;
50.000
50.000
40.000
40.000
30.000
30.000
20.000
20.000
10.000
10.000
0
0
-10.000
82
84
86
88
Source : International Monetary Fund
90
92
94
96
98
00
-10.000
02
International Reserv es
400.000
400.000
China, P. R.: Mainland:FOREIGN EXCHANGE; MILLIONS OF US$
350.000
350.000
300.000
300.000
250.000
250.000
200.000
200.000
150.000
150.000
100.000
100.000
50.000
50.000
0
0
80
82
84
86
88
Source : International Monetary Fund
90
92
94
96
98
00
02
Summary : Is the Yuan overvalued ?
• The reasoning based on trade is misleading, hypocritical, and too
short-term : in the long term, a growing, liberalizing China will absorb
a fast increasing volume of imports, and is therefore more an
opportunity than a threat, especially on a regional basis. Besides,
Chinese current account surplus has declined, not increased, recently.
• Purchasing power parity calculations suggest significant
undervaluation : 3,7 Yuan per dollar instead of 8,3. But it is hard to
find what the equilibrium exchange rate is in a fast reforming economy
• Strong reserve accumulation also suggest a real exchange rate
undervaluation (on the basis of the FEER) : If large FDI inflows are
considered as « structural » (given the investment needs in a booming,
reforming emergent country), then the FEER of the yuan would sustain
a current account deficit instead of a surplus.
Inf lation and interest rates
35
35
30
30
China, P . R.: Mainland:CHA NGE S IN CONS UME R P RICE S ; P E RCE NT P E R A NNU;;
25
25
China, P . R.: Mainland:DE P OS IT RA TE ; P E RCE NT P E R A NNU;;
China, P . R.: Mainland:LE NDING RA TE ; P E RCE NT P E R A NNU;;
20
20
15
15
10
10
5
5
0
0
-5
-5
94
95
96
97
Source : International Monetary Fund
98
99
00
01
02
03
Reasons for not moving now
• No fundamental domestic disequilibrium linked to exchange rate
undervaluation; in particular, no inflation
• Reserve accumulation provides a cushion against future risks and has
been sterilized, with little impact on domestic monetary policy
• Growth is high, but has slowed down, and high growth is necessary. A
cyclical argument does not point toward appreciation of the yuan.
Unemployment has been increasing recently.
• Poor banking system, huge need for reform, with severe displacement
of workers : real undervaluation can help domestic reform.
• Companies and financial markets are not in a position to manage
exchange rate risk. Financial reform and the development of market
based risk instrument is a prerequisite for more exchange rate
flexibility.
Prospects ahead
• Economic reasons to move overtime
– Large country, need to rely on autonomous macroeconomic
(monetary) policy
– Gradually, and only gradually, need to reform and liberalize capital
markets, which will necessitate some exchange rate flexibility
• Political reasons to move shortly : trade disputes,
multilateral framework
• Political economy reasons to move over time : China
should aim at appearing as a benevolent regional leader. As
we know well from recent history, the exchange rate of a
big power is a problem for the others.