A Study Of RMB Appreciation On The Impact Of China-US Economic Development

From July21,2005till today, the overall trend of the exchange price for RMB todollar has continued to rise and the cumulative appreciation has reached20%. Thispaper takes the objective economic conditions of China and America into account andanalyzes the influence of RMB appreciation on the real issues such as Americanpolitics, economics, employment and China’s economic development. And finally, theconclusion is drawn.Based on fixed exchange rate theory, floating exchange rate theory, managedfloating exchange rate theory, purchasing power parity theory and previous relevanttheory, this paper analyzes the reason for RMB appreciation and discusses the impactof RMB appreciation on America and China’s economic development, and finallydraws a conclusion.Why does RMB appreciate? This paper discusses the reasons as follows:1、Theexternal drive is that America--the representative of western countries--hopes for theappreciation of RMB. Due to continuous weakness of the dollar and trade deficit ofEuropean countries, Australia, Japan, Canada, RMB appreciation are expected to shiftthe risks of their currencies appreciation against China. On that account, their businessinterests are safeguarded and the international price competitiveness of Chineseproducts and services are reduced. Western countries put pressure on China constantlyon RMB exchange rate and carry out a variety of trade barriers, anti-dumping andcountervailing initiatives in order to resolve the huge trade surplus of western countries.Another purpose is that western countries can dilute the debts owed to China by RMBappreciation.2、RMB has a great appreciation space. China’s long-term double surplusexists in aspect of capital projects and current projects against America. A lot offoreign exchange reserves are strong evidence of overall national strength, while also increase the pressure of foreign exchange. In order to reduce the pressure of foreignexchange reserves, China issue the national currency to reduce foreign exchange,which leads to pressures of inflationary. Meanwhile, China increases the intensity ofcapital return through the People’s Bank of China to reduce the domestic inflationpressures, which increases the pressure of RMB appreciation.3、The large inflows ofinternational hot money increase the demand for RMB convertibility, which causesserious problems such as the excess liquidity of domestic capital. To avoid the bubbleeconomy in China, the central bank takes macro-control to raise interest rates,benchmark interest rates on deposits or other measures, which promotes theappreciation of RMB.4、 RMB becomes an international currency needs. Theinternationalization route of RMB is actively promoting and China has signed bilateralcurrency swap agreements with multinational banks. Internationalization of RMB canrealize freely convertible capital projects and make RMB as a reserve currency, whichdevelop the power of RMB appreciation.What is the actual impact on America economy about RMB appreciation?Americans hope that America can return manufacturing, increase U.S. exports to China,stimulate economic growth and reduce unemployment by means of RMB appreciation,but the American’ expectation in reality is difficult to achieve. On the one hand,because there are the huge labor remuneration gap between China and America. Thedata in the U.S. Bureau of Labor Statistics Labor Review Monthly in April2009showthat China’s labor hourly wage is$0.81, which accounts for only2.7%compared withthe level of wages of labor per hour over the same period in2006. The huge gap oflabor remuneration between China and the United States and the slight appreciation ofRMB can not change the price advantage of labor input-oriented manufacturingproduction in China at all. On the other hand, Americans have changed work habits,for instance, China’s exports to the export of manufactured goods and America importsto the import of manufactured goods, which make America become a major exporter ofChinese manufactured goods naturally. The above analysis has clearly elaborated thatRMB appreciation can not make manufacturing move from China to the United States.In the short term, the RMB appreciation can not make manufacturing move from China to other countries, either. Because manufacturing migration enablesmanufacturers to bear the loss of investment in fixed capital investment in China andcan not form a mature manufacturing industry workforce like China in other countries.Americans’ expectation on stimulating U.S. economic growth via RMB appreciationstrategy is hardly achieved, while it will cause high inflation of the U.S. economy andonce again face the last century problem of stagflation.Throughout the history of the United States for nearly a century economic crisis,the United States relies on the manufacturing as economic engine to go out of the1929-1933crisis; the United States relies on economic globalization as economicengine to go out of the stagflation crisis in the seventies of the last century; the UnitedStates relies on the real estate industry as economic engine to go out of the Nasdaqcollapse crisis at the beginning of this century. America find that RMB appreciationonly meets the aspirations of the American-Statesman rather than resolve the crisis,which is a way that a strong political flavor, impractical and detrimental to the U.S.economy.What is the actual impact on China economy about RMB appreciation?We believe that the slight appreciation of RMB can not fundamentally change thecomparative advantage of Chinese exports to the U.S. manufactured goods in the shortterm, not to mention compensation for the huge labor cost differences between Chinaand the United States. This paper again demonstrates that the slight appreciation ofRMB can not change the price advantage of manufactured goods in China. Due to theslight appreciation of RMB, the prices of some Chinese manufactured goods are notnecessarily improved. The reason is that the price of China imports raw materials, fueland intermediate products will be reduced, which offsets the rising price of Chineseexports to the U.S. manufacturing finished goods to some extent. In the short term,from intractable psychological factors of the consumer, even if RMB appreciationleads to rising prices of some Chinese manufactured goods, it is difficult for Americansto give up the consumption habits of Chinese manufactured goods.In the long term, the gradual appreciation of RMB indeed has the impact onexports to America. Some manufacturing production moves out of China, however, it is not envisaged that manufacturing return to America but some emerging economiescountries enjoy the great benefit. Because the appreciation of RMB enables the lowprice of these countries labor relative to China. The relocation of the manufacturingsector can make Chinese exports decrease. While consumption, investment, net exportsare the troika to promote economic growth, which encourages China to accelerate thechange of ways of stimulating economic growth. The expansion of privateconsumption is the key to maintain stable economic growth in China. Income increaseis the most important motivation and basis of consumption increase, so the Chinesegovernment greatly increases the income of rural residents in the implementation ofthe policy that improves the overall income of Chinese residents in China. Substantialincrease in income will provide effective protection for stimulating consumption andexpanding consumer policy as well as achieving the social objectives of commonprosperity advocated by the Chinese government.In summary, the result of the United States adopting RMB appreciation strategyhas brought a completely opposite effect on Sino-US economic development. Theopposite effect is not Americans’ expectation, for it is a positive impact on China but itis a negative impact on America. The key reason is that Sino-US economicdevelopment is at different stages. Compared with America, there is a lot of room foradjustment for China. The strategy of Americans forcing the appreciation of RMB hasthe actual impact on the U.S. economy as follows: the manufacturing industryunreturned, the downturn in economic growth, the state of continuing highunemployment may induce the high inflation of the U.S. economy in the short term.The actual impact on China’s economic development is that China will continue tomaintain comparative advantage of exports to the U.S., promote China speeding upchanges in the way of stimulating economic growth, and enhance well-being ofChinese society in the long run.