During his trip to Switzerland to participate in the annual meeting of Banks for International Settlements, Zhou Xiaochuan, Governor of People’s Bank of China (PBOC), expressed the view that the high price of oil was one of the reasons for RMB appreciation and that PBOC was very aware of and closely monitoring the situation. The Governor added that along with the high price of oil, domestic inflation and a large trade surplus, were some of the reasons for RMB appreciation.
In the past few days, the RMB has continuously climbed on the US dollar, going from 7.30 to the dollar to 7.27. Many reputable sources have predicted that the pace of RMB appreciation will accelerate this year. In the meantime, the price of oil has gone up over $100 per barrel.
RMB appreciation could reduce the prices of different imported goods and ease domestic inflation pressure. There is however little room for a price reduction on imported goods, which have a very low household consumption rate in China.
The Chinese government is now actively picking up the pace on RMB appreciation in order to cope with the pressure that high oil price brought onto the Chinese economy.
More and more arguments are made every day regarding the impact on the real economy of a 12% higher RMB to the dollar since its peg from the USD was lifted in July 2005. Some coastal companies competing by using low labor costs have recently gone bankrupt. For instance, after the Christmas period, the largest Christmas tree producer in Shenzhen, because of RMB appreciation, has closed down. The government will, in the near term, initiate a survey about the effects of a stronger RMB on small and medium-sized enterprises, attempting to seek the right answer for certain pressing questions.
Regardless, until the government finds any disadvantage of RMB appreciation, it looks like PBOC is happy with the current pace of elevation on the national currency.
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