RMB appreciation is economically unwise for all
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From the perspective of world economic recovery, an appreciated RMB could slow down the world's most important growth engine: the Chinese economy. Despite concerns expressed by politicians, it is a common belief among American economists that sustainable economic growth in China will contribute to economic recovery for both the world and the U.S.
The RMB exchange rate is also a core issue regarding China's transition economy. Foreign trade accounts for more than 60 percent of China's economy. Even a relatively small appreciation of the RMB would have a significant effect on China's imports and exports. As a highly trade-dependent nation, China cannot afford an overly rapid appreciation of the RMB. In fact, China's foreign exchange reforms have been very encouraging. As recently stated by the Premier Wen Jiabao, the RMB has appreciated 21 percent against the US dollar, or 16 percent in real terms, since July 2005.
In addition to the trade balance and economic growth, there are many factors that may affect and reflect changes in the RMB exchange rate, such as interest rates, inflation, capital flows and speculation. The role and interactions of a range of issues sponsored by governmental and non-governmental factions have to be taken into account. In many senses, the RMB exchange rate is not just about trade balance; rather, it is about the balance between the forces of interdependence and globalization on one hand and the domestic economy and national interests on the other. There is significant consensus that China's sustainable development will serve the best interests of China, the U.S. and the rest of the world.
The reality is that China's foreign exchange regime is much more complicated than that of any other nation. China is the largest developing nation in the world, and while China looks strong on the surface, the Chinese government needs more time to improve its policy and institutional regime. Criticism from the U.S. aside, in the absence of a well-developed capital market and market-oriented interest rate, it is very difficult for China to make a determination of the appropriate real exchange rate. Any rush in RMB appreciation will harm China's sustainable development. China is a learning economy, and it is learning from the U.S. in terms of trade politics and RMB politics.
In light of China's rising role in the world economy, the wisest policy for American politicians would be to continue supporting China's reform while maintaining a sustainable and feasible pace. This will be the best alternative – economically and politically – for both sides.
The author is a columnist with China.org.cn. For more information please visit: http://m.formacion-profesional-a-distancia.com/opinion/node_7075405.htm
