From News, page 5, issue 397, Dec. 8, 2008
Translated by Zuo Maohong
Original article: [Chinese]

Last week, on the eve of the fifth China-US Strategic Economic Dialogue, the renminbi depreciated dramatically against the US dollar for four consecutive days. The drop was triggered by a 156 basis point jump in the central parity rate on Monday, the biggest one-day fall since the currency was de-pegged from the US currency in 2005.

The week-long depreciation sparked off widespread suspicion. Is it a result of government manipulation? Will it continue or is there an end in sight? Is capital flowing out of China as a result?

The Economic Observer brought these hot topics to Yu Yongding, director of the Institute of World Economics and Politics, Wang Qing, chief economist for Morgan Stanley's Greater China region, and Peng Xingyun, director of the monetary theory and policy department of the Institute of Finance and Banking.

Who's Playing?
EO: The renminbi encountered unusual depreciation in the past days. Why?

Wang Qing: I think it represents a policy shift more than change in the markets. If you look at China's balance of payments, we find no grounds for depreciation - it still has such a big trade surplus and huge foreign exchange reserves. So the only explanation is that it was policy-directed. In other words, [the government wants] to boost economic growth by depreciating the currency.

Peng Xingyun: First of all, it means the government's attitude toward foreign exchange rate policies has changed in order to cope with the financial crisis and the uncertain economic outlook. From the latest nine financial policies we can see clearly that the exchange rate has become a tool for moderately loose monetary policy.

Second, such an attitude change also reflects the foreign exchange market's expectations for China's economic future. So it's not totally a result of government control - the markets are also a factor.

Third, this is an attempt by the government to improve the exchange rate system. It's actually trying to find how far the renminbi can fluctuate against dollar.

Looking back on the adjustment of the exchange rate in the past several years, there's much to be pondered on. The Chinese currency has appreciated too fast, especially since this June. The depreciation now may be a correction of overly aggressive appreciation in the past.

EO: The depreciation happened right before the China-US Strategic Economic Dialogue (SED). Is this significant?

Wang Qing: The Chinese government may have used it as an opportunity to express their concern over the economy, to say that they need to consider all kinds of measures to guarantee economic growth.

Yu Yongding: I think the Chinese government will not base its exchange rate policy on such an event. It's not a political game.

Short-term Adjustment or Long-term Trend?
EO: Is the depreciation now a temporary adjustment or a longer-term trend?

Wang Qing: Though China will have much lower exports over the next several quarters, I believe the renminbi is unlikely to continue depreciating. Considering the new exchange rate policy – which may be only temporary, I expect the rate to be stable in 2009.

Yu Yongding: I have never changed my opinion on the renminbi, that it will keep gaining value. Look at China's trade and balance of payments and you'll find out whether the currency is going up or down.

And I have always believed that China has been overly dependant on foreign demand, which is a major factor to blame for our economic troubles. In the future we need be more reliant on domestic demand. This should be the direction for our policies.

Peng Xingyun: The depreciation this time is a measure to cope with the financial crisis and the changed macro economy. Without this factor, the Chinese currency has plenty of room to continue appreciating, as China is still in a period of fast-growth. Besides, its appreciation helps the global currency system to diversify, especially at a time when the US subprime mortgage crisis has led to global financial trouble and everyone has been condemning the dollar-dominated international currency system.

As long as China maintains a surplus in its current accounts and its foreign reserves are accumulating, the renminbi will appreciate.

EO: Some say the renminbi's depreciation this time was to help export-oriented companies survive the harsh winter. How helpful can it be to these companies?

Yu Yongding: It's correct to stabilize the export market as the central government has stressed, but how to stabilize it needs extra consideration. I think we should do it by improving companies' competitiveness and technology. At the same time, the government should provide support to specific troubled companies.

Wang Qing: The most obvious advantage of depreciation is to make China-made commodities more competitive. In my opinion, the difficulties export-oriented companies are facing now are more a result of severely worsening external demand than an aggressively stronger renminbi.

In such a circumstance, a weaker currency may help to slow down the slip in export orders, but it won't reverse the trend.

Leading to Capital Outflow?
EO: Will a weaker renminbi lead to a temporary capital outflow?

Yu Yongding: It's certainly possible. But I believe the Chinese government is paying attention to cross-border capital flows. Both when the renminbi is gaining and losing value, we need to close off as many risks as possible when the world is in financial turbulence.

We had such a firewall in the past, and now we need to maintain it. We still have the money to do so at the moment. On the condition that normal capital flow and trade remain unobstructued, China should improve its management of cross-border capital as much as possible.

Peng Xingyun: If it's only the Chinese currency that is depreciating and all the other currencies stay steady, then there will be relatively high capital gains for other currencies and thus a bigger chance of a capital outflow. However, with the global market in such disorder, such capital still needs to consider where to move to. So it's too early to make that judgment.

EO: If the renminbi keeps falling in value, will other currencies follow?

Yu Yongding: We can keep an eye on that. As the global economy slows, world trade volume decreases. All countries are hoping to import less and export more. It's not hard to imagine what the result will be if China adopts such a policy at such a time.

Peng Xingyun: If the renminbi depreciates greatly in the short term, there's a chance of such competitive depreciation. But it's only a slight chance, because such competition is not good for any country in terms of financial stability. And even if the renminbi declines considerably in value for a short period and exerts certain pressure on other countries, fear of competitive depreciation may lead to capital outflow in these countries in an even bigger scale than in China.

In the past ten years, China has accumulated huge foreign exchange reserves. The Asian region has been building a system for currency exchange and coordination. Therefore, everyone will give careful thinking to such competition, and China will obviously not allow its currency to go on depreciating as greatly as it has in the past several days.