RMB EXCHANGE RATE TREND AND ADJUSTMENT

Review of RMB exchange rate

After the opening-up and reform, RMB exchange rate has experienced a V-shaped movement. The first phase was from the opening-up and reform to exchange rate reform. In this period, with the widening and deepening of opening-up policy and the development of foreign trade, RMB, which had been over-valued at the initial stage of reform, went down gradually to its real value. The second phase started from the managed floating exchange rate in 1994 and has continued to the present. During this phase, RMB, with stable and slightly upward trending exchange rates, gradually established its status as a strong currency in the world.

Perspectives for RMB exchange rate

In the authors' opinion, during the next three Five-year Plans, RMB exchange rate will remain stable and edge up slightly in the first five years, then maintain its stability but begin to weaken in the second (2006-2010), and will witness a sharp drop in the third (2001-2005).

A rapid economic growth until 2005 will help RMB remain strong in the short and medium term. In the long run, however, after nearly 20 years of rapid growth, China's economy may face a gradual depression, which will certainly result in a severe adjustment to RMB exchange rate.

Currently, China's sound balance of international payment and foreign exchange reserves have supported the recent RMB exchange rate stability. Nevertheless, as China fulfills its WTO commitments, China's exports will encounter difficulties. The situation of settlement surplus exceeding trade surplus indicates a considerable inflow of short-term capital. Also, the stabilizing effect of foreign exchange reserves on the value of domestic currency is not as remarkable as expected. For instance, the foreign exchange reserves of Japan rank first in the world, but it also saw violent fluctuations in its exchange rates in recent years.

China has not denounced forex regulation and RMB is still unconvertible under capital accounts, so RMB is likely to remain stable in the short and medium term. After China's entry into the WTO, forex administration will continue, but certainly there will be gradual deregulation. Accordingly, the forex market will become more active and pose a challenge on the RMB exchange rate.

Adjustment of the RMB exchange rate

Intentional depreciation of RMB should never be allowed. China's promise of not allowing the depreciation of RMB not only benefits the stability of the global economy and finance, but also meets the requirements of China's economic development.

Precautions should be taken to prevent inflation. Chinese government has been successful in combating inflation, and its administrative power to manage finance and allocate resources is still strong today. However, the past success, to a large extent, depended on high centralization of authority, which divided contradictions among different departments for them to shoulder or control. At present, with an intensified market economy, China's monetary policy operation must advance with the times.

Forex regulation should be more reasonable and lifted gradually. The current system of a managed floating exchange rate is still the best alternative in the short and medium term. However, with China's entry into the WTO, the floating range of the RMB exchange rate should be widened gradually. It reflects the 'managed' characteristic to achieve stability and meanwhile, accentuates the 'floating' necessary to increase the flexibility of the RMB exchange rate.

(by Zhang Wendan, Zhou Shangqing & Zhu Yantao)