US Dollar Depreciation May Force RMB Appreciation

• Comments
• Print
• Email

The US dollar has been depreciating a bit of late, and as the Chinese RMB yuan is pretty much pegged to the US dollar, it has been depreciating right along, notably against the euro and the Japanese yen. This is causing a lot of pain in those areas, so much so that there is talk of resorting to protectionist measures. It looks as though

 

Meanwhile, industrial action in other areas is underway. On October 6, the EU trade body ruled that seamless steel pipes imported from China pose a threat to the EU and it will begin levying anti-dumping duties of 17.7-39.2%. The following day, the US Commerce Department announced it would also conduct anti-dumping investigations on seamless standard pipes, pipelines and pressure pipes.

 

Chinese Ministry of Commerce statistics show that, from January to August this year, 17 countries and regions have initiated 79 trade remedy investigations against China, involving a total amount of about $10.035 billion, up 16.2% and 121.2%, year-on-year, a trend that looks likely to continue to spread. In mid-July, the WTO predicted the number of global anti-dumping cases in 2009 will reach 437, an historical high.

China worries about the depreciation of the dollar, for its huge foreign exchange reserves, largely dollar-denominated, may shrink. In the recent G20 meeting, China asked the US to maintain the stability of dollar, for the purpose of keeping the stability of RMB against other major currencies. The devaluation of RMB and US dollar together will also provoke a strong protectionist backlash. Although China's exports have dropped significantly, its market share has not and its trade surplus keep growing.

 

Since the dollar hit a low of 6.8009 against the yuan on September 23, 2008, it has been hovering around 6.83 for nearly 10 months, a situation China finds congenial. People's Bank of China governor Zhou Xiaochuan has stressed repeatedly that RMB appreciation by itself is not the solution for global economic imbalances. China fears that RMB appreciation will merely undermine its exports without reducing the US trade deficit, and that other exporting countries may jump into the gap, resulting in China bearing the adjustment and other countries riding free.

 

Data from GTA, a British research organization on trade issues, show that the current number of discriminatory trade cases globally is far more than that of free trade bills, at a ratio of 6:1. Governments are introducing an average of 60 trade protection measures per quarter, and more than 90% of the world's traded goods are becoming subject to at least some protection measures.

 

China has long been a target of international trade disputes, having experienced the highest number of anti-dumping investigations for 14 consecutive years and the most countervailing investigations for three consecutive years, and remains the largest target in this round of protectionism. There are 134 trade protection measures other governments are currently planning or preparing for implementation, 77 of them against China.

 

The global economy is still out of whack and the basis for economic recovery remains fragile. Unemployment in Western countries continues to rise, and China's trading partners are not going to be satisfied merely with protectionist measures. Look for increased pressure for RMB to appreciate.