The average exchange rate (middle price) of RMB Yuan against US dollars Monday broke 8:1 mark and hit 7.9982:1. This is a new record in the exchange rate of RMB since the reevaluation of Yuan on July 21 last year. Clearly, it is an important symbol of the increasing flexibility of RMB exchange rate mechanism.
However, people should not ignore the fact that when China is rapidly advancing the reform of RMB exchange rate mechanism and actively promoting the trade balance through expanding domestic demand, the US dollar simply continues acting like a "spoiled child" within the international financial system, selfish and self-indulgent, not willing to be responsible for its dominant reserve status in the international financial system, for the excessive issuance of the currency, and for its low saving rates. All it expects is to let developing countries like China assume the consequences of the economic imbalances, just like what it did in dealing with the currency relations with the Japanese Yen in the last century.
China is facing an increasingly conspicuous problem: how should it deal with the US dollars as such a "spoiled child"?
Excessive issuance of US dollars has led to an excess liquidity of the global economy and served as a macro background of the appreciation of RMB. To observe the exchange rate curve of the RMB against the US dollar, one must first study the dollar trend.
From 2001 onwards, in order to hedge the technology bubble economy and the negative economic impact of the "9.11" terrorist attacks, the US Federal Reserve continued to adopt a slack fiscal policy and lowered down the federal benchmark interest rate from the original 4%-8% to 1% and maintained the level for a three-year period. Associated with this, Bank of Japan implemented the world loosest monetary policy and lowered the interest rate to zero so as to fight against the long-term deflation and economic depression.
In recent years, Bank of England, the US Federal Reserve, the European Central Bank, etc, have already, one after another, begun to increase the interest rates. Bank of Japan has recently concluded the four-year expansionary fiscal policy in an attempt to tighten its excessive liquidity. But the overall pattern of the excessively loose fiscal environment still remains.
From the view of global pattern with the massive issuance of US dollars, some Asian countries, taking China as a typical head, accumulate this kind of "junk currency" (whose purchasing power is continuously declining) through large scale of export. This is a very unfair pattern for these Asian countries.
Given the overall pattern of the loose global liquidity, the status quo of the global economic imbalances has become the important surveyor's pole that dominates the flow of the capital. In 2005, the US current account deficits amounted to over $800 billion, while the surplus of Europe, Japan, oil-exporting countries, and some emerging Asian economies increased. The huge amount of US current account deficits and the rapid growth of debt have gradually damaged the confidence of foreign investors. International investors believe that a long-term depreciation of the US dollars is inevitable which will unceasingly increase the exchange rate risks of the dollar assets. Meanwhile, the United States is right at the end of one interest rate rise cycle. But Japan, Euro zone countries, China and some other countries and regions are right under way of accelerating the economic recovery therefore right at the initial stage of an interest rate rise cycle. The gap of the yield spreads between dollar assets and the assets of other countries and regions will gradually be narrowing.
Under such circumstances, the investment attractiveness of the US dollar relative to other countries and regions assets is evidently weakening, which has led to a gradual shift of the global capital from focusing on the dollar assets to the assets with higher rate of return and smaller exchange rate risks in Japan, Asia and other emerging areas. This is also why the stock exchange prices keep on rising in the bull market in Japan, India, China's Hong Kong, Brazil, China and other countries and regions. The flowing trend of the global capital led to an ample liquidity in the surrounding markets. Within a short term, it is difficult to reverse the trend. This also exerts pressure upon the rising of exchange rate of these countries.
By People's Daily Online; The author Ba Shusong is deputy director and research fellow with the Financial Research Institute, Development Research Center of State Council
Original at http://english.peopledaily.com.cn/200605/19/eng20060519_267096.html
