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Depreciating dollar hits market

By Yi Xianrong (China Daily)
Updated: 2008-04-30 09:30

Many foreign governments and researchers have been saying since 2002 that the undervalued Chinese currency renminbi is to blame for the world economic imbalance and especially that between the US and China.

They claim that renminbi's low exchange rate against the US dollar has led to China's huge favorable balance of trade with America, and the widening trade deficit of the US with China has caused the latter's foreign reserves to grow too fast.

Therefore, they believe, the world economy will return to a sustained and stable development once the renminbi exchange rate rises high enough against the US dollar.

The fact, however, is that the renminbi exchange rate rose from 827.65 yuan for $100 in July 2005 to 699.8 yuan for $100 yesterday, a jump of 18 percent in less than three years, but China's favorable balance of trade with the US kept growing fast instead of shrinking.

China's foreign reserve also increased at an accelerated pace: by $208.8 billion in 2005, $247.5 billion in 2006 and $461.7 billion in 2007. Then it reached $1.6821 trillion by the end of the first quarter of this year after adding another $153.9 billion.　　

The appreciation of renminbi has not curbed the growth of China's favorable balance of trade with the US or that of its foreign reserve, which proves China's foreign reserve has multiplied faster with the appreciation of renminbi.

Why is the theoretical conclusion so different from the reality? Is it because the theory is wrong or there are not enough facts to sustain that theory? If the lack of facts is the reason, then what facts exactly are missing?

As a matter of fact, the renminbi exchange rate is not simply a question of appreciation or depreciation, but one of a very complicated relationship of interests. It is particularly complicated by the fact that exchange rates are used to adjust the relationship of interests between countries.

Currently, the value of renminbi is depreciating domestically and appreciating externally. The depreciation of renminbi on the domestic market is shown in the facts that China's first-quarter consumer price index (CPI) stood at 8 percent, the standard interest rate for one-year deposits in banks was 4.14 percent and that the negative interest rate of renminbi savings was 4 percent. Such serious negative interest rate means renminbi is definitely depreciating domestically.

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