The US Treasury Department released on November 27, 2012 its biannual “Report to Congress on International Economic and Exchange Rate Policies,” which again finds China is not manipulating its currency exchange rate. While acknowledging that the real effective exchange rate of the renminbi (RMB) had appreciated 12.6% against the dollar from June 2010 to November 9, 2012, the report also asserts that the RMB is still “significantly undervalued,” on the basis of “the exceedingly high foreign exchange reserves,” “the persistence of its current account and trade surpluses,” and “rapid productivity growth in traded goods sector”.
It is a persistent notion in the United States that the RMB is undervalued because China has been running a persistent, huge trade surplus, especially with the US. And thus, the RMB is particularly undervalued against the dollar. However, this supposed cause-and-effect linkage is actually not well proven.
First, the same exchange rate can see different trade balances. The best case for analysis is the Eurozone. During the first eight months of 2012, Eurozone countries had a wide disparity in their trade balances. Germany had by far the largest trade surplus of €125.3 billion, followed by the Netherlands, €31 billion, and Ireland, €29.3 billion. France, on the other hand, had a huge trade deficit of €56.5 billion. Spain and Greece also had trade deficits of €23.8 billion and €10.2 billion respectively. As all of these countries share the same currency – the euro – nobody would think their currency is undervalued. Nevertheless, the fundamentals behind these trade balances is the export competitiveness, not the exchange rate of each country.
Second, RMB exchange rate fluctuations during the past 12 years did not bring about relevant trade balance changes in either global trade at large, or trade with the US in particular. From 2000 to 2004, when RMB was pegged to the dollar at 8.28, China’s global trade surplus was actually small, ranging from $24-32 billion. Ironically, during the period of 2005 to 2008, when RMB floated and appreciated by 21.2% against the dollar, global trade surplus shot up by 825% to $295.46 billion, contrary to the general notion that appreciation leads to a fall in trade surplus. Then, global trade surplus steadily shrank to $155.14 billion in 2011, despite RMB being pegged to the dollar during the first year and a half and floated again during the last one and a half years. Throughout the period examined, China’s trade surplus to the US continued to rise, regardless if RMB was pegged to the dollar or not. Therefore, other factors leading to China’s trade surplus changes need to be explored.
Third, US exports to China have out-performed exports to the rest of the world. From 1997 to 2011, US exports to the world grew by 115.3% from $687.60 billion to $1,480.67 billion. However, US exports to China grew nearly three times as fast, increasing by 710.9% from $12.81 billion to $103.88 billion. Again, conventional notions don’t work. Had the RMB been undervalued, US exports to China should have grown more slowly. Nevertheless, during the same period, US exports to China grew 27% faster than imports from China, while US exports to the world grew 15% more slowly than imports, a fact that cannot be explained by an “undervalued RMB”.
Fourth, the same exchange rate also saw tremendous differences in different export categories from the US to China. According to US Department of Commerce data, US exports to China grew by 5.8% during the first 9 months of 2012. Exports of agricultural products grew by a remarkable 45.4% and transportation equipment grew by 17.3%. On the other hand, exports of computers and electronics barely saw positive growth at 1.1%. Furthermore, exports of chemicals decreased by 0.5% and exports of machinery faced a significant fall of 9.3%. However, all export groups face the same RMB exchange rate.
Finally, with the same RMB exchange rate, China has trade deficits with Japan, South Korea and Taiwan; yet it maintains surpluses with the EU and US. According to China Customs statistics, during the first 10 months of 2012, China had a $24.91 billion trade deficit with Japan, $62.86 billion with South Korea and $77.87 billion with Taiwan. Despite having the same exchange rate, China has a $100.94 billion and $182.56 billion trade surplus with the EU and US respectively. Again the RMB exchange rate cannot explain the differences in trade.
Interestingly, over the past year, China’s trade deficit with Japan fell by 39% from a year ago, yet its deficit with South Korea decreased by a mere 3% and increased by 5% with Taiwan. Apparently, the exchange rate is not the reason for these changes as each country faced the same RMB. These large disparities can be explained by a big fall in China’s imports from Japan following Japan’s encroachment upon China’s Diaoyu Island. Big disparities were also seen in China’s trade positions with the EU and US, with a fall of 16.7% in its surplus with the EU and a rise of 10.3% with the US. It is obviously not explained by the one RMB rate, but by the fall of China’s exports to the EU following the euro debt crisis.
He Weiwen is Co-director of the China-US/EU Study Center at the China Association of International Trade
