HSBC Chief economist Stephen King (Jane Shixun) wrote an article to refuse American Financial Minister Geithner’s opinion on Chinese exchange rate in British Finance Time published on 19th September. The original title is it is right for Beijing to ignore the appeal about exchange rate. Following is the content for the whole article.
Analyst thinks if “RMB exchange rate act” pass or come into effect will cause Sino-US trade campaign.
In Washington, all of the people think RMB should revaluate, but in China, not every person agrees on this opinion. Maybe Chinese is right? After all, it is easy to blame other country’s control of exchange rate maliciously to cause the trade imbalance. In the middle period of 1980s, Japanese trade surplus is regarded as the result of undervalued currency deliberately by Japan. Although since then Japanese Yuan has already revaluate in large scale ? Japanese Bank decide to stabilize Japanese Yuan exchange rate in last week ? Japanese trade surplus still increased toughly.
Nowadays, it is China causing the flames of anger of Washington. America thinks, China is its competitor in 21 century worldwide, which is one of the reasons China does not give in to Washington actively. But Chinese reluctance is also because it has some more fully doubt. The oral evidence of American Financial Minister Tim Geithner in the Parliament last week expressed usual idea, undervaluing currency “help Chinese export industry and mean import goods will be more expensive in Chinese market”. So, it leads to its domestic consumption decrease. His speech is based on below hypothesis, the change of nominal currency will lead to competitive ability appear sustainable adjustment. Following, this will improve current global imbalance situation. These two supposes all have serious defects.
At first, Chinese per capita income is still not high. Per capita annual income is about 3 thousand USD, while American is 40 thousand USD. This gap is shrinking slowly because Chinese new open attitude attracted high quality capital and management. They combined with plenty of low cost labor, making China has extremely strong competition. In other words, China hold more and more share in world trade increasingly have nothing with undervaluing currency.
Moreover, RMB revaluation has no much effect on changing Chinese competitive status. The most important improper resource allocation is not fully utilized labor. Chinese plenty of rural poor labor confines the increase speed of salary. ? The minor increase of salary will attractive more workers to come to prosperous city to further confine the salary increase. If RMB revaluate, this confine will become even bigger. The temporary decline of export competition will be cancelled by domestic salary. Therefore, the following idea by Chinese leaders is quite right. RMB revaluation will have no much effect except for very short-term effect. Seen from long run, it will harm Chinese labor people.
The second hypothesis is also in doubt. Surely, the decision-makers want to make exchange rate adjustment use as the way of “new balance” all the time. Japan once tries to do like this in 1980s, but at the same time of reducing export, its economy develops prosperously, paving the road for the foam and following stagflation deflation. In Britain, Pound devaluated in 2008, but trade performance is still not good. China has many reasons not to take radical action by holding these two examples.
Can the increase of Beijing foreign exchange reserve verify China is controlling its exchange rate? Even about this problem, I can not be convinced. China is very likely to reduce holding American debt and to enter more extensively series of asset including American company. But the attitude of American parliament is very cold. In fact, in the light of the House of Representative always forbid China to buy American company by the reason of national security, China only can invest the surplus on USD.
Because China is the second large economy entity, any revaluation of RMB means the devaluation of USD. Therefore, describing American exchange rate policy as USD devaluation rather than RMB revaluation maybe more accurate. - What this policy reflected is not American trade difficulty rather than its extreme large debt (international trade). If USD devaluate, the national debt issued by Financial Ministry in order to support American financial system will be reduced largely by converting to RMB. ? While seen by Chinese, this is more like to arrears debt disguisedly. They do not hope to see the RMB revaluation is normal.
Then, what measure can be taken? America need change its increasingly thick protectionism idea. American should not forget history. The reason for them to implement stimulating actions all depend on the strong financial ability of creditors such as China and so on. Punishment only can make this world drop into the vicious circle of protectionism, exchange rate volatility and interest impact.
Therefore, to America, more rational method is realizing the two super large countries like China and America rely on each other will cause any threaten of this kind to generate opposite effect. At the same time, America should cooperate with Beijing to push urgently needed social program and consuming credit reform in China (China wholesale). Before China implement reform and Chinese learn to consume rather than save, no matter how high the RMB revaluated, Chinese usual projects surplus will not disappear. From: wholesale dropship
