Stronger Yuan Arouses Concern

　　The exports of Beijing Haifu Trading Co. Ltd.last year were 4 percent higher than those in 2012，but the company didn’t make much money， accordingto Li Haifu， owner of the company.

　　Sitting in the Dahongmen area， Haifu is mainlyengaged in the production of curtains and beddings，with most of its products being exported. Accordingto Li， for exported products， the U.S. dollar is usedat all stages from ordering to settling， and it takesfour months for the company to collect the paymentfor goods. Owing to fierce competition in the textilemarket， the prices charged cannot be too high.

　　When making quotations， Li’s company aims to earnonly a small profit， but when collecting money， theyhave found that because of the yuan’s appreciationand price hikes in raw materials， the profits weremuch lower than they had anticipated when receivingorders.

　　“Last year we exported two batches of products，with one batch only covering the costs but makingno profits，” Li said. However， to maintain hisbusiness， he has to receive orders even if profits arenonexistent.

　　Substantial appreciation of the renminbi hasdampened the competitiveness of Chinese exportorientedcompanies. According to figures releasedby the Bank for International Settlements on January15， the effective exchange rate of the renminbi rose7.89 percent throughout 2013. That is to say， if acompany received an order of export at the beginningof the year and collected money at the year’send， they would lose 7.89 percent of the profitsowing exclusively to exchange rates.Zhang Monan， an associate researcherwith the State Information Center，said exchange-rate liberalization isan important step on the road to therenminbi’s internationalization. However，this stage progressed too rapidly in 2013.Over the year， the renminbi exchange rateagainst the U.S. dollar hit record highs 41times， which was unprecedented sinceChina initiated the exchange rate reformin 2005.

　　Zhang thinks the renminbi will continue to appreciatein 2014 for two reasons. Firstly， the continualliquidity expansion of offshore renminbi will furtherincrease the yuan’s appreciation. Secondly， thetightened money supply within China’s financialsystem since last year will cause earning-rates differencesbetween Chinese and U.S. treasury bonds tocontinue expanding， which will also help push therenminbi to appreciate.

　　That means in 2014， Li and bosses of otherexport-oriented companies will continue to sufferfrom the pressure brought about by the renminbi’sappreciation.

　　Unilateral appreciation

　　The renminbi’s appreciation is easy to understandagainst the backdrop of the quantitative easingpolicy introduced by the U.S. Federal Reserve (Fed).But after the Fed announced it would begin a drawdownof quantitative easing in December last year，it is hard to say if a stronger yuan will bring joy orsorrow to the Chinese economy.

　　One of the goals for China’s exchange rate reformwas to ensure that the renminbi was no longerpegged to the U.S. dollar but instead to a basket ofcurrencies. Viewing the current situation， this goalseems to have been reached： In 2013， the renminbiexchange rate did not fluctuate because of changesin U.S. dollar supplies or fluctuations of theU.S. dollar’s exchange rate against thoseof other currencies. Overall， the U.S. dollarseems to be imposing a reduced influenceon the renminbi exchange rate.

　　A commonly accepted opinion amongindustrial insiders is that the growingdemand for renminbi in the internationalmarket and the improving Chineseeconomy are the main reasons for therenminbi’s appreciation.

　　According to a report released onJanuary 23 by the Society for WorldwideInterbank Financial Telecommunication(SWIFT)， in both November and Decemberof 2013， the Chinese currency was one of the top10 most-used currencies for payments in terms ofvalue. In December 2013， the yuan’s market sharewas 1.12 percent， ranking eighth， while in January2012， its market share only ranked 20th at 0.25percent.

　　“The fact that between November and December2013， other currencies grew 7 percent whilst therenminbi grew 15 percent， however， might suggestthat use of the Chinese currency is becoming businessas usual for the world’s financial institutionsand corporations，” said Franck de Praetere， head ofPayments and Trade Markets， Asia Pacific， at SWIFT.

　　Adverse impact

　　All of the above begs the question of whether ornot China will benefit from the yuan’s continual appreciationin the international market. Li said he is a“victim” of the renminbi’s appreciation， therefore hedoesn’t wish for the renminbi to increase its value.

　　Wang Yong， a macroeconomic researcher withCITIC Securities Co. Ltd.， also thinks the competitivenessof Chinese export-oriented companies will beattenuated and that China’s position as the workshopof the world will be weakened by the renminbi’sappreciation. To address the increasing costs，many manufacturing companies have begun tomove their factories from the coastal areas of southChina to the inland areas or even other countriessuch as Cambodia， Bangladesh and Viet Nam.

　　Global Sources Ltd. conducted a survey lastDecember with over 500 Chinese companies. Theresult shows that renminbi appreciation is the mostpressing challenge they face in 2014. In comparison，in the 2012 survey， the exchange rate problemranked only fourth on the list， coming after risingcosts， price wars and the decline in orders fromEurope and the United States.

　　Continual appreciation of the renminbi alsoimposed heavy pressure on domestic consumerconsumption. Fuelled by expectations of renminbiappreciation， the international hot money markethas engaged in a veritable frenzy of yuan speculation.

　　This money has entered China through itscapital market， resulting in increased inflation. Inrecent years， the Chinese Government has formulatedmeasures to control prices， which have to datehad taken some effect. However， since the renminbiis still in the process of appreciation in the internationalmarket， there is still space for hot money tospeculate in renminbi. Particularly after the Chineseeconomy has recovered， the new round of pricehikes will further knock down the domestic purchasingpower of the yuan.

　　Wang said China should watch out for the unilateralappreciation of the renminbi. A cautionaryexample is Japan after the Plaza Accord in 1985.

　　The accord made the Japanese yen’s exchange rateagainst the U.S. dollar rise remarkably， and the Japaneseeconomy then promptly entered into recessionfor more than two decades. The United States haslong claimed that the renminbi is artificially undervalued，but this remains a very aberrant opinion.

　　Ye Shumei， a manager of Beijing Youth TravelService Co. Ltd.， welcomes the yuan’s appreciation.“The number of outbound travelers hit record highsagain in 2013， and many Chinese go abroad forshopping. This is because of the appreciation of therenminbi，” Ye said.

　　She thinks if the renminbi continues appreciationagainst the U.S. dollar in 2014， she will yield evenbetter results.

　　Wang thinks the biggest benefit of the yuan’sappreciation is that it contributes to the currency’sinternationalization. In the last decade， China hasbeen making the renminbi a more international currency.

　　Owing to its continual appreciation， the yuanhas become more attractive in the internationalmarket， particularly while the U.S. dollar continuesto depreciate. To date， China’s central bank hassigned bilateral currency swap contracts with 22countries and regions with a total value of nearly 3trillion yuan ($491.8 billion).

　　Flexibility needed

　　Starting this year， China will comprehensivelydeepen reforms. Various reforming measures， includingexchange rate reform， will also be further accelerated.How to guarantee national interests andavoid damaging people’s interests during the reformprocess is a big challenge for decision makers.

　　Zhang said that unilateral appreciation of therenminbi indicates that China is still unfamiliar withthe operations of the international monetary marketand has no targeted measures. When China’s tradesurplus shrinks and its economic growth slowsdown， massive inflow of hot money has becomethe most powerful force pushing up the renminbiexchange rate. This also means the appreciation ofthe renminbi carries hidden risks.

　　Unilateral appreciation has not occurred becausethe yuan’s influence in the international market hasincreased. In the past year， the renminbi appreciatedwith the price of damaging China’s national interestsas well as those of export-oriented companies andChinese people in general. Export-oriented companieshave enough grounds to demand that decisionmakers adopt powerful measures ensuring a stableexchange rate for the renminbi.

　　Zhang thinks that in the short term， China shouldmake the renminbi exchange rate more flexible.

　　On the other hand， China should also acceleratethe launch of derivatives such as renminbi exchangerate futures and options， establish a market-orientedprice formation mechanism for the renminbiexchange rate， adopt a uniform exchange ratebetween offshore and onshore renminbi and avoidspeculation caused by the long-term price distortionin the offshore and onshore markets， Zhang added.

　　In the middle and long term， China should reconsiderits strategy for renminbi internationalizationthat relies on the offshore market， Zhang thinks.Capital export， such as overseas investment， tradecredit and issuance of renminbi bonds by foreigninstitutions， may be a better way to export renminbi.

　　Zhang Ming， Director of the Department ofInternational Investment of the Institute of WorldEconomics and Politics under the Chinese Academyof Social Sciences， said the Chinese Governmentis expected to continue its reform of the renminbiexchange rate formation mechanism this year， andthe central bank may announce its decision in thefirst half to expand daily fluctuation of the yuanexchange rate against the U.S. dollar from 1 percentto 2 percent or even higher.

　　This means that the central bank will furtherrelax intervention with the renminbi exchangerate， thereby allowing fluctuations to better reflectchanges in market demand. Robust appreciation ofthe renminbi in 2013 may yet be avoided.