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Evolution of renminbi exchange rate regime
(China Daily)
Updated: 2004-10-11 09:13
The renminbi exchange rate issue has been at the centre of trade disputes
between China and its major trading partners during the past year. It is also a
key factor in China's ongoing macro management efforts.
Guo Shuqing, director of the State Administration of Foreign Exchange and
deputy governor of the People's Bank of China, the nation's central bank, shares
his views, as a scholar, on this issue in an article published on the September
issue of Foreign Exchange magazine.
Staring today, China Daily will publish the article in five parts, focusing
respectively on the evolution of the renminbi exchange rate regime and the
relationships between the exchange rate and foreign trade, employment,
industrial structure and capital flows. The fifth part will also contain the
director's conclusions.
Following is the first part - the evolution of the renminbi exchange rate
regime.
Since China embarked on its reform and opening-up policy in 1979, the
renminbi exchange rate regime has undergone transformations from a single
official rate to a dual-track system, and then to a single market rate.
The 1997 Asian financial crisis had a significant impact on the renminbi
exchange rate forming mechanism.
The renminbi exchange rate system has experienced three phases since the
start of the reform and opening-up policy.
First phase: 1979-93. The renminbi exchange rate, used as a tool for
financial planning under the planned economy, was long fixed at overvalued
levels. Therefore, the renminbi exchange rate was devalued repeatedly over a
fairly long period of time after the start of the reform and opening-up policy
to meet the needs of reform and economic growth.
A dual-track system, with both the official exchange rate and one for foreign
trade-related internal settlement, was gradually developed, while the foreign
exchange swap market rate was introduced later.
The official renminbi exchange rate was lowered to 580 yuan per US$100 at the
end of 1993, down 73 per cent from the 158 yuan per US$100 level at the
beginning of 1979.
Meanwhile, the average renminbi exchange rates against major trading
partners, or the nominal and real effective exchange rates, slid by 68 per cent
and 76 per cent respectively.
Second phase: 1994-97. The official renminbi exchange rate and the foreign
exchange swap market rate were integrated on January 1, 1994, starting a
market-based, managed floating rate system.
Although the official exchange rate was lowered by 33.3 per cent upon the
integration, real devaluation of the currency was 6.7 per cent given the fact
that 80 per cent of forex transactions then were done in the swap market.
The rate integration changed the long-standing situation of renminbi
overvaluation and, therefore, reversed a persistent trend of decline. The
renminbi strengthened by 4.8 per cent against the US dollar from 1994 to the end
of 1997. Taking into account the rapid domestic price increases between 1994 and
1995, the real appreciation of the yuan against the US dollar was 39 per cent.
Meanwhile, the renminbi's nominal and real effective exchange rates rose by
10.2 per cent and 38.7 per cent respectively.
Third phase: 1998 to date. Strong expectations for a yuan devaluation emerged
in the marketplace in 1998 as the Asian financial crisis deepened, amplifying
capital outflows.
In a bid to prevent the crisis from spreading further, the Chinese Government
made a commitment to not devaluing the renminbi, keeping it at the 828 yuan per
US$100 level. That made a significant contribution to buttressing the economic
and financial stability of Asia and the world.
Shortly after initial results were achieved in the nation's efforts to tackle
deflationary pressures, there came the external and internal shocks of the
September 11 terrorist attacks, the global economic recession and the outbreak
of the severe acute respiratory syndrome epidemic. China maintained the
consistency in its exchange rate policy and continued to enforce the relatively
narrow range for the renminbi exchange rate.
Although the change in renminbi exchange rate against the US dollar was
fairly small during this period, it was not so against other currencies.
Between 1998 and 2001, with most of the world's currencies weakening against
the US dollar, the yuan became one of a few strong emerging market currencies.
Renminbi's nominal and real effective exchange rates rose by 11.5 per cent and
9.8 per cent respectively.
After 2002, the renminbi exchange rate softened along with the US dollar's
adjustment. By the end of 2003, the renminbi's nominal and real effective
exchange rates fell by 12.3 per cent and 11.0 per cent respectively.
Speaking of the overall situation, the renminbi exchange rate, either on a
bilateral or multilateral basis, was on a downward spiral before the rate
integration. But afterwards, it became relatively flexible, moving in different
directions against different currencies to varied degrees.
Although the renminbi, following the US dollar, has somewhat edged down in
recent months, it remains on an upward trend.
The renminbi's nominal and real effective exchange rates rose by 6.7 per cent
and 31.5 per cent between 1994 and 2003. In nominal terms, the currency
strengthened by 5.1 per cent and 10.3 per cent against the US dollar and the
Japanese yen respectively, while the real appreciation was 20.1 per cent and
59.1 per cent considering inflation differences.
A few basic facts can be drawn from the above.
The evolution of China's exchange rate system was market-driven. Although
there have been interferences from external factors, the direction has not been
changed
The renminbi exchange rate kept falling in the early years of reform, but has
been on a stable uptrend over the past 10 years
Compared with China's trading partners, the renminbi's
average exchange rate has seen a lot of fluctuations. It appreciated by more
than 20 per cent in the recent 10 years, or nearly 60 per cent if inflation is
taken into account
The
narrowing in the renminbi exchange rate floating range after 1997 not only
benefited China, but also was what Asia and the world needed
China has never manipulated its currency, because by pegging to the US
dollar, the exchange rate has had both ups and downs, making it impossible to
always benefit from improved price competitiveness in export commodities, let
alone any other extra benefits.
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