7/27/2019 Impacts of an Appreciating Currency -The Renminbi

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The renminbiAn Introduction

The renminbi(RMB) is the official currency of the Peoples Republic of China. The Yuan () is

the basic unit of the renminbi, and also used as a synonym of the currency, especially in

international markets. The currency is issued by the People's Bank of China, the monetary

authority of China.

Until 2005, the value of the renminbi was pegged to the U.S. dollar. Since then, as China

pursued a transition from central planning to a market economy, and increased its participation

in foreign trade, the renminbi was devalued to increase the competitiveness of Chinese exports.

It was claimed, previously, that the RMB exchange rate was undervalued by 37.5% against its

purchasing power parity.

The Rise

Under pressure from its major trading partners, China moved to a managed peg system and

began to allow the RMB through a gradual appreciation over three years. In July 2008, China

stopped the appreciation of RMB due to the effect of the economic. From July 2005 through

June 2013, the RMB appreciated by 34% on a nominal basis against the dollar and by 42% on a

real (inflation adjusted) basis.

Why is it so important?

The RMB is so important a currency because China, currently the 2nd

largest economy, is a very

important country and being the largest manufacturing economy in the world, anything that

affects its economy has global implications. The RMB is currently the 8th

most traded currency

in the world and not unrealistically it may even become a reserve currency in the future.

Economic Winners and Losers

This scenario has created many winners and many losers. Industries that were focused on

exporting products and services were primarily hit except where a larger portion of their inputs

have to be imported. Lower production costs and reduced cost of final product (by a greater

factor than their increase due to the currency appreciation) gives an overall net positive result.

WinnersElectronics Manufacturing, Automotive & Aeronautical Manufacturing, Energy

Electronics - Largest contributor to the increase in Chinese exports is the electronics

manufacturing sector. Without the surprising increase in electronics exports (US$

5849.1million), total exports would actually decrease by around US$3000 million. The key to

this sector growing against the trend is the amount of imported inputs in this sector. Astrong

RMB facilitates cheaper imports thereby substantially reducing production costs.

7/27/2019 Impacts of an Appreciating Currency -The Renminbi

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Automotive and Aeronautical- A more expensive RMB increases costs in China, but it also

reduces the prices of imported components and materialswhich account for about 50% of the

costs for after-market spare parts manufactured in China.

Energy/Power GenerationChina is an economy which has immense energy needs both in

terms of petrol to fuel cars as well as inputs to fuel power plants. AnAstronger RMB means thatChinese imports of oil, gas and related products are cheaper and in turn push down energy

prices.

LosersTextiles, Chemical Manufacturing

Many industries that were export oriented like textiles, chemical manufacturing, were hit by

the rising RMB in addition to rising production inputs and labor costs. This reduces

competitiveness in the international markets and eats significantly into profits.

TextilesMany Chinese textile exporters were hit by RMB appreciation as early as 2009 and

with profit margins as low as 3% it was difficult for them to absorb the cost of the rising RMB.

Chemical ManufacturingIncreased cost of the final product due to the exchange rate makes

the product weaker against competition in the international markets. In markets where the cost

has been a major selling point Chinese firms will be hit even harder.

Conclusion - Is it in Chinas interest to appreciate?

For China, a country that wants to look at a more flexible exchange rate system, increased

flexibility, under the conditions prevailing today or during most of the period since 2003, would

imply appreciation. To understand whether appreciation would help, the reasons to considerare:

Overheating Excessive reserve accumulation Long-run need to use the exchange rate for expenditure-switching Avoiding future crashes. Low price level by international standards.

While the discussion above has outlined some of the winners and losers, the greatest

beneficiary from a gradual RMB appreciation, accompanied by measures to stimulate demand,will be China itself.

Considering the ongoing process of urbanization and regulatory reforms, the Chinese economy

still has great momentum. If the Chinese government stimulates consumption in the domestic

economy the Chinese can use this momentum to build a more balanced economy while pushing

their offerings up the value chain.