An export decline for four straight months is again generating RMB exchange rate disputes in and out of the government. Since currently most major world currencies are depreciating against the USD, if the government focuses on the RMB/USD rate only, risks in the settlement of other currencies will increase.Â
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Several analysts at the Ministry of Commerce (MoC) are saying that, to encourage exports, the government should correct people’s misunderstanding on exchange rates, and make it clear that exchange rate stability is not the same as the stability of RMB/USD rate.
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"The stability we expect is not only stability against the USD, but against all currencies," said MoC researcher Li Jian. "What is stability? Now the RMB is stable against the USD, but is appreciating against the euro, Australian dollar and the yen, so RMB’s exchange rates against these currencies are not stable."Â
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The current export decline puts people in mind of the export crisis spawned by the Asian financial crisis in 1998, when possible depreciation of the RMB became a hot issue. Bi Jiyao, an expert at the National Development and Reform Commission, believes the recent exchange rate reform still lags behind the current situation. China has sought to unpeg RMB from the USD, but in fact the peg still exists.
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Li Jian says the current financial system, led by the USD standard, had been weakened, and its influence on emerging markets is declining, so China may start to unpeg with USD in its exchange rate reform. Â
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Companies, whether they are importers or exporters, are the direct victims of exchange rate fluctuation. According to Ren Haijin, vice-general manager of Zhejiang International Business Group, such fluctuations add risk and uncertainty to Chinese companies�overseas dealings. In December and January, Chinese costs for commodities were changing sharply due to exchange rate fluctuation, and there was little Chinese enterprises could do during settlement-if they settled according to the contract, they lost money, since exchange rates of relevant currencies depreciated 10-20% during the delivery period. When a lot of Chinese goods are impounded and auctioned by foreign customs, foreign companies seize the opportunity to buy Chinese goods at very low prices.
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"Chinese companies are at great risk in accepting overseas orders, for prices can be uncontrollable," said Ren Haijin. Â
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Lu Zhengwei, chief economist of China Industrial Bank’s operation center, said if China didn’t adjust its exchange rate policy, a monthly trade deficit might occur before the end of 2009, and that if the export situation failed to rebound in the second quarter, China would have to reconsider its exchange rate policy.
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An undervalued RMB may help enterprises to gain more competitiveness on the international market and may relieve some export decline, though the chief current cause of slowing exports is lack of demand and oversupply, not an expensive RMB. But since other countries are all paying rapt attention to China’s currency policies, if RMB shows any signs of long-term depreciation, China’s trade partners may be unwilling to settle in RMB, and they might well decide their own currencies are overpriced. China needs to thread the difficult needle of finding a way to support its exports and reinforcing RMB’s influence in neighboring trade areas at the same time.
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