RMB Exchange RateBUSI 3001 SBLCWeek 9 (12), Spring 2010

Charles Mo & CompanyMay 10, 2010

RMB Exchange Rate

What’s the problem with Remenbi exchange rate? Most would agree that RMB is undervalued What exchange policy should China choose?

Lesson from the Yen/ Japanese GDP growth Great Currency Debate

Complaint from Congress to President Bush. Under valued Yuan contributes to: US trade deficit Lost jobs in US Suppress US economic growth

Current Washington Position Congressional attempts to legislate Chinese currency RMB undervalued by how much?

Is China a currency manipulator? History of RMB China Banking Reform China’s current exchange-rate policy Financial Acronym

What is the issue with the RMB Does China believe it is not undervalued? US believes RMB is undervalued

Why US is reluctant to make any legislative or formal complaint to the international governing bodies?

Does Japan think RMB is undervalued? What is Japan’s position on RMB?

Does EU countries think RMB is undervalued?

What options does the Chinese have?

Continue to peg to the US dollar Appreciate over time – conflicts, tensions in trade deficits,

internal inflation Appreciate one time off – affect export, worsen economy

Float the currency Japan as precedent, not a good strategy De-stabilize Chinese financial system

Spend all the US currency held in the central bank

Japanese case In 1990, Japan was on track to become the #1

economy Average real growth was exceptionally high

1950-1970 8.4% annual per-capita 1970-1990: 3.4% annual per-capita

Large trade surpluses Value of Yen rising

1971 360 Yen = 1 US$ 1973 300 Yen = 1 US$ 1990 130 yen = 1 US$ 2009 Ave 4% appreciation

Adjusted per cap GDP higher than US

Japanese Yen

NIKKEI - Bubble Burst

1985 12,000 1989 39,000 1992 16,000 2009 8,700 After 1991, Japan stopped growing. Average per cap

growth is 1.0% Most Japanese do not see this as a crisis; Japan is still a

wealthy, high-tech society, albeit with weak growth

Japanese Unemployment Rate

Treasury Secretary Geithner and Vice Premier Wang Qishan, April 8, 2010

Issues on an undervalued Yuan Does it significantly harm the US economy? Would the currency focused legislation and other

punitive actions that some in Congress have called for, such as a World Trade Organization (WTO) case against China, actually speed China’s currency reform?

RMB contributes only marginally to the economic problems

Undervalued RMB “contributes” to the US trade deficit

Trade with China : 2009

NOTE: All figures are in millions of U.S. dollars, and not seasonally adjusted unless otherwise specified. Month Exports Imports Balance January 2009 4,178.1 24,748.0 -20,569.9 February 2009 4,678.4 18,874.5 -14,196.1 March 2009 5,569.9 21,187.7 -15,617.8 April 2009 5,164.9 21,918.7 -16,753.8 May 2009 5,247.8 22,731.5 -17,483.8 June 2009 5,549.2 23,979.1 -18,430.0 July 2009 5,274.3 25,691.2 -20,416.9 August 2009 5,553.1 25,784.7 -20,231.7 September 2009 5,813.7 27,914.9 -22,101.2 October 2009 6,857.4 29,520.8 -22,663.4 November 2009 7,326.3 27,549.9 -20,223.6 December 2009 8,362.9 26,501.0 -18,138.1 TOTAL 69,576.0 296,402.1 -226,826.1

Trade with China : 2008NOTE: All figures are in millions of U.S. dollars, and not seasonally adjusted unless otherwise specified. Month Exports Imports Balance

January 2008 5,854.9 26,167.7 -20,312.8 February 2008 5,773.9 24,128.6 -18,354.7 March 2008 6,354.1 22,432.0 -16,077.9 April 2008 5,680.6 25,919.3 -20,238.6 May 2008 6,614.3 27,663.6 -21,049.4 June 2008 6,413.7 27,843.3 -21,429.6 July 2008 6,437.3 31,314.0 -24,876.8 August 2008 6,506.7 31,840.2 -25,333.5 September 2008 5,320.4 33,086.4 -27,765.9 October 2008 6,071.6 34,028.3 -27,956.7 November 2008 5,223.4 28,280.6 -23,057.2 December 2008 5,206.1 25,085.8 -19,879.7 TOTAL 71,457.1 337,789.8 -266,332.7

Year US Exports US imports US trade balance

1980 3.8 1.1 2.7

1985 3.9 3.9 0

1990 4.8 15.2 -10.4

1995 11.7 45.6 -33.8

2000 16.3 100.1 -83.8

2001 19.2 102.3 -83.1

2002 22.1 125.2 -103.1

2003 28.4 152.4 -124.0

2004 34.7 196.7 -162.0

2005 41.8 243.5 -201.6

2006 55.2 287.8 -232.5

2007 65.2 321.5 -256.3

2008 71.5 337.8 -266.3

2009 59.2 292.5 -233.3

Source: USITC

Senator Charles Schumer, one of China’s toughest critics in Congress

The fact that China’s currency has not depreciated but even appreciated a little while all other currencies depreciated against the dollar does show some progress

Mr. Schumer said he still believes China is manipulating its currency

This wouldn’t have been the opportune time to designate the country as a manipulator

During the presidential campaign

When Mr. Obama campaigned for president, he was among the toughest critics of China, accusing the country of manipulating its currency and signing on to legislation which punishes China for manipulating its currency

Senator Lindsey Graham, long a critic of China’s currency practices

The issue of China’s currency appears to have taken a political turn

Something happened between the confirmation hearing(Treasury Secretary) and the report

The South Carolina Republican said more must be done to address the existing currency imbalance.

Letter of complaint on China’s Undervalued Yuan

15 of the 24 Democratic members of the powerful House Committee on Ways and Means sent a letter to Former President George W. Bush on March 26, 2008 China’s undervaluation of the yuan makes US

exports to China more expensive and Chinese exports to United States cheaper

Contributing to mass US trade deficits Suppression of US economic growth

China Exchange Policy affect US Loss of manufacturing jobs

Has accelerated manufacturing job losses US productivity gains resulted in job losses

3.3 m jobs loss from 83-02 in low and mid skilled jobs 1.2 m job gain, up 37% 98-07 US share of global manufacturing output rose from 22.3 to

24.7% with a smaller workforce (US Bureau of Economic) China’s share is 11.4% (UN Ind. Develop. Organization)

US Unemployment Rate

The effectiveness of a RMB Devaluation – using 2007 Trade Deficit figure

China 32% 256 b

Asian countries

17% 136 b

Other countries

51% 408 b

Total 100% 800 b

US global trade deficit in 2007

US Economy Shrank

Congressional attempts to legislate Chinese currency

10 currency related bills introduced since the 110th Congress convened in January 2007

Senator Chuck Schumer(D-NY) and Lindsey Graham (R-SC) introduced a bill imposing a 27.5% tariff on all Chinese goods imported

Senate Finance Bill (S1607) Baucus-Graassley Schumer-Grham

Senate Banking Bill(S.1677) Dodd-Shelby

House Bill(h.R. 782) Hunter-Ryan

Reform to the Treasury Report

Treasury must determine whether a currency is “fundamentally mid aligned”

Treasury must determine whether a country manipulates” its exchange rate

Determination of “fundamentally mis-aligned” to the standard of “currency manipulator”

Key Enforcement Measurement

Antidumping (AD)Ban federal procurementIMF involvementOppose financing to companies doing business

IMF consultationWTO Tariff and Trade

ADIMF consultationFinancing restriction

Administration View on Chinese Currency

Bush was against currency legislation Obama not to label China a manipulator of

currency RMB is undervalued China has taken steps to rebalance the economy Allowing RMB to appreciate Passed the 585 b stimulus program China’s currency continued to rise while other

currencies have fallen Risen 16.6% from June, 2008 to February, 2009 Since 2009, RMB is stable Economic relations between China and US have

become more tense

Capital Account Convertibility or CAC is a monetary policy that centers around the ability to conduct transactions of local financial assets into foreign financial assets freely and at market determined exchange rates.[1] It is sometimes referred to as Capital Asset Liberation.

In layman's terms, it is basically a policy that allows the easy exchange of local currency (cash) for foreign currency at low rates.[citation needed] This is so local merchants can easily conduct transnational business without needing foreign currency exchanges to handle small transactions.[citation needed] CAC is mostly a guideline to changes of ownership in foreign or domestic financial assets and liabilities. Tangentially, it covers and extends the framework of the creation and liquidation of claims on, or by the rest of the world, on local asset and currency markets.[2]

RMB History

1949-76 PRC founded under Mao 1976 Deng Xiaoping came onto helm to reform the

Chinese economy 1978-89 Reform/stop 1990 RMB fixed exchange 1 US$= 5 RMB 1995 1US$ = 8.5-8.3 RMB 2005, July Started significant revaluation 1US$=8.3-8.0 April, 2009, 1 USD = RMB 6.83

Historical Chart of the RMB (Chinese Yuan)

49-76

76-89 90 95 00 01 02 03 04 05 06 07 08 09

Mao Zhedong

Deng Xiaoping

5 8.5 8.3 8.3 8.3 8.3 8.3 8.0 7.5 7.3 7.0 6.8

5 Year Chart RMB to USD

Undervalued? By how much?

Different economists have different estimates 40% Average (by William Cline and John Williamson of

the Peterson Institute of International economics) Most would like to see either a gradual or a

sudden one time appreciation

China’s new exchange-rate policy the RMB appreciate since the spring of 2005, RMB pecked to a basket of foreign currencies Chinese authorities have again linked the RMB to

the dollar, since June 2008 Sentiment is that Yuan should devalue

China and US economic relations China has expressed concerns in the US Treasury

bills. China owns 500 b in US Treasury bills US relies on borrowing from the Chinese Obama administration officials have sought to

reassure the safety of the US assets During the presidential campaign, Obama was

among the toughest critics of China manipulating the currency

Treasury secretary, Geithner during the confirmation said China is manipulating the currency

Critics of China RMB policy Senator Charles Schumer, one of the China’s

toughest critics in Congress Senator Lindsey Graham, long a critic of China’s

currency practices

What will be affected of an appreciation in RMB

Chinese Economy Inflation Interest Real Estate Export Import GDP growth Unemployment

American firms investing in China Value of investment Import Finances

Biggest Four Banks in China

Bank of China (BOC) Industrial and Commercial Bank of China (ICBC) China Construction Bank (CCB) Agricultural Bank of China (ABC)

1983-84 spins off four major state-owned banks (the Big Four)—the Bank of China, Industrial and Commercial Bank of China, China Construction Bank (CCB), and Agricultural Bank of China—from the People's Bank of China (PBOC).

1994 reorganizes the Big Four into commercial banks to be operated on a profit-and-loss basis.China also establishes three policy banks—China Development Bank, Export-Import Bank of China, and China Agricultural Development Bank—to perform policy-lending functions.

1995 The PRC Law on the PBOC allows PBOC to act only as a central bank, overseeing China's monetary policy and regulating the entire financial sector, rather than carrying on commercial banking functions.

1996 China permits the establishment of Minsheng Bank, China's first publicly traded, largely private bank

2001 joins the World Trade Organization (WTO) and promises to open its banking sector gradually to foreign firms by December 11, 2006.

2003 China amends the PRC Law on the PBOC and the PRC Commercial Banking Law to establish the China Banking Regulatory Commission (CBRC) to oversee and regulate the banking industry.

2006 Under China's WTO commitments, the country is scheduled to fully open its banking sector to foreign banks by December 11.

Acronym

IMF = International Monetary Fund SDR = Special Drawing Rights AIG = American International Group RMB= Ren Min Bi (人民币 ) WTO = World Trade Organization GATT = General Agreement on Tariffs and Trade