On July 21, 2005, China revalued the Yuan from the old mark of 8.2765 to 8.11 to the US dollar: A two-percent revaluation to the dollar. At that time, The People’s Bank of China (PBOC) also announced that the Yuan no longer would be pegged to the US dollar and instead will be pegged to a basket of trade-weighted currencies. The PBOC neglected to mention just what currencies are included in the basket. What’s next?
By George Lauriat, Editor-in-Chief, AJOT
After months of sustained pressure by the United States and the European Union, China relented and re-valued the country’s currency (known as both the Yuan and the Remminbi. For the purposes of this article, China’s currency will be labeled as the RMB) by roughly two percent against the US dollar. China has fixed its RMB in a narrow band at around 8.28 to the dollar for the past decade. Consequently, China’s major trading partners assert that the RMB exchange gives Chinese exports an unfair advantage.
This exchange advantage works to the detriment of other nations exporting to the US, EU and Japan as well as to domestic industries. According to critics, China’s policy of an undervalued fixed exchange rate for the RMB amounts to an export subsidy under the WTO Agreement on Subsidies and Countervailing Measures and violates Article XV of the World Trade Organization’s General Agreement on Tariffs and Trade regarding currency manipulation. In addition, the policy is contrary to the International Monetary Fund’s rules.
The two percent increase pales against the 27.5% that would be demanded (see Yuan re-valuation: The 800 lb Panda of trade) by the US if some controversial legislation were enacted. In April 2005, Senator Charles Schumer, D-NY and Senator Lindsey Graham, R-SC, introduced a bill that would place a 27.5% tariff on all Chinese imports to the US, if within six months China does not revalue the currency 30% against the US dollar. The RMB reevaluation may have for the moment bought some time, but the legislation is far from dead.
The major change is that under the new monetary regime the RMB will no longer be exclusively (or possibly at all) pegged to the US dollar. A spokesperson for the PBOC issued the following statement to explain the new scheme.
“After the reform, the RMB will no longer be pegged to the US dollar. Instead, the RMB exchange rate will be determined based on a basket of currencies selected in line with the real situation of China’s external economic development. At the same time, proper measures could be taken to manage and adjust the RMB exchange rate based on market supply and demand and according to the domestic and international economic and financial developments with reference to the calculated exchange rate indices of the basket currencies, as an effort to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.
Reference to a basket of currencies indicates that the RMB exchange rate could be affected by the exchange rate changes between the foreign currencies, but not necessarily a peg of RMB to the basket currencies.” (Editor’s italics) [Might make a pull quote ]
“The managed floating exchange rate regime must also be based on another important factor which is the situation of market supply and demand.”
The Golden Rule and the new abacus economy
There is an oft-told business proverb called the Golden Rule: “He who has the gold rules.” In many respects, the Golden Rule succinctly defines the PRC’s economy. Irrespective of the WTO and other international accords, China’s economy is still centrally planned, and to a degree, executed. There are in fact over 140 companies deemed strategic that ultimately directly answer (frequently with stock controlled through government holdings) to Beijing. Hence the economic policy is by definition designed to accumulate as much “gold” as possible to further the country’s political, social and economic agenda. In so far as an export economy furthers those goals, Beijing is willing to loosen the reigns of cont