The Role of the Renminbi in the World Economy
2008; Cato Institute; Volume: 28; Issue: 2 Linguagem: Inglês
ISSN
1943-3468
Autores Tópico(s)Global Financial Crisis and Policies
ResumoAs China's economy has continued its remarkable expansion and gained an increasingly important role in the global economy, China's currency, the renminbi (RMB), has also captured growing attention from investors and policymakers around the world. In this article, I briefly discuss three significant issues concerning the renminbi--namely, the near-term direction of the exchange rate, the renminbi's convertibility in the medium term, and the currency's international role down the road in the future. Exchange Rate Outlook On July 21, 2005, China embarked on long-awaited currency reforms toward the goal of greater exchange rate flexibility. Since then the renminbi's annual nominal appreciation has averaged about 5 percent against the U.S. dollar. On a trade-weighted basis, however, the appreciation of the renminbi has been almost negligible. What will happen next? On the one hand, the Chinese authorities remain cautious toward fast-paced and substantial currency strengthening. On the other hand, it is also clear that pressures are continuing to build both at home and abroad--for far more pronounced renminbi appreciation. Domestically, China faces rising inflationary pressures and equally worrisome, rapidly developing equity and property bubbles. At the same time, rebalancing requires tighter macroeconomic policies and expenditure switching from net exports and fixed investment to private consumption. First, let us take a quick review of key developments in China's domestic economy. Needless to say, the economy has been extremely buoyant, with red GDP growth averaging more than 11 percent for the last several quarters. Rapid credit expansion, fast growth in fixed investment, torrid pace in net exports, and an overheated property sector all present flash signs about the risk of overheating in China's economy. CPI inflation was zero or even slightly negative just a few years ago, but has since rapidly picked up, approaching high single digit levels, according to the official measures. I suspect the official inflation statistic has probably underestimated the true extent of inflation, because of a variety of measurement problems. For instance, the official CPI index does a rather poor job in capturing price increases in the rapidly expanding service sectors, such as health care, education, transportation, and housing-related services. Furthermore, continued government price controls and subsidies on crucial fuel and energy items distort the official CPI index. Regardless of the precise measure of the rate of inflation, there seems little doubt that there are rising inflationary pressures in the Chinese economy. Equally worrisome are the sizzling equity and property markets in China. Judging from the price-earnings ratio, the Chinese domestic stock market, mainly consisting of the renminbi denominated shares or the so-called A shares that are listed and traded in Shanghai and Shenzhen exchanges, is now the most richly valued market in the world. And rampant liquidity inflows and speculative frenzies continue to push the stock market to ever higher, unsustainable levels. Any observer who has been following the breathtaking surge in Chinese equity prices and housing prices would see an asset price bubble in full display. The People's Bank of China has in general done a very good job in managing these difficult issues. In addition to sustained moral pressures on banks to restrain lending through window guidance, the central bank has hiked interest rates and, far more aggressively, increased reserve management on bank deposits. But the risks of both consumer and asset price inflation remain largely unabated. At the same time China's external trade and current account surpluses have continued to balloon. The current account surplus exceeded 9 percent of GDP in 2006, and increased to more than 11 percent in 2007. What is unique about China's current account is neither the surplus nor its persistence, but its magnitude, especially in relation to its GDP. …
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