After the Renminbi depreciated for five consecutive months, the market has again seen signs of a pick-up. Some analysts believe the unusual change in RMB exchange rate means the RMB has stopped depreciating like in 2012, and the RMB exchange rate has begun returning onto the track of appreciation. This is not only because of the better-than-expected foreign trade figures. But also because the authorities’ proactively moved to support, export, and check hot money and thus suppressed RMB appreciation. Such analysis is backed by past experience, but it has deviated from the goals of RMB exchange rate reform.
Under the international currency regime, changes in exchange rates are not fully determined by supply and demand in the market. Instead, they rest on competition between countries to maximize their own self interest. Therefore, whether the RMB rises or drops in value in the first half of year, it should be the outcome of the central bank’s overall deliberation on national interests. Such decisions brook no questioning. Blaming the Chinese government for manipulating the RMB, as the Americans have done, is unfair.
Since changes in the RMB exchange rate is based on the overall evaluation of the national economy, it is thus parochial to view the changes as supporting exports and stemming the speculation of hot money. Judging from the current state of the international foreign exchange market, more than 95 percent of foreign exchange transactions have nothing to do with international trade. So, the goals of changing the RMB exchange rate should be broader. That is to say, the short-term goal is formulating the RMB’s exchange rate to be market-friendly; the long-term goal should be to create conditions for the RMB to become a major reserve currency in the international market.
There are multiple reasons for the marketization of the RMB exchange rate. But the most important one is to change the past pattern of unilateral appreciation or depreciation, and making the RMB exchange rate fluctuate. Without fluctuations, a pricing mechanism is out of the question. Therefore, the central bank’s decision to make the RMB depreciate marked the first step in fluctuating its exchange rate. Changes in the RMB exchange rate may fluctuate in a certain range for a period of time. However, the margins of ups and downs will get bigger and the cycle longer over time. Meanwhile, the fulfillment of the short-term goal will lay an important institutional groundwork for liberalizing China’s capital account, making the RMB freely convertible, and internationalizing the RMB.
The long-term goal of RMB exchange rate reform is to accelerate the internationalization of the RMB, making it a major reserve currency in the global system. This has been decided through domestic consensus. Unless the RMB becomes a main international reserve currency, China can’t establish itself in the international currency system, no matter how much stronger its economy becomes. Recently, both at home and abroad, we have heard people say the RMB will be the dominant currency in the international market by 2030, taking the place of the US dollar. This entails a full internationalization of the RMB, or the RMB becoming a settlement currency, investment currency, or reserve currency in the international market.
Though the RMB has increasingly been used as a settlement currency, it has a long way to go before catching up with other international currencies, whereas the RMB capital account is yet to be fully liberalized, and the RMB is not freely convertible. Under the new conditions, advanced economies have increasingly changed the model of global governance. At present, as a collective entity, advanced economies are no longer content with the existing globalized governance model and the rules of market operation. Through new trade and investment agreements and long-term and stable currency exchange networks, they have formed a complete new “Holy Alliance” in order to rewrite the rulebook for the international market. This makes accelerating the internationalization of the RMB even more imperative, and presses us to encourage extensive use of the RMB in international reserve, cross-border trade, and overseas investment, so as to highlight the “Chinese force” in promoting reforms in the international currency regime.
If the RMB continuously depreciates or becomes a weak currency, no country or company will accept it as a reserve currency. It is thus obvious that the continuous appreciation of the RMB is an important condition for accelerating its internationalization. The continuous appreciation of the RMB also depends on the strength and efficiency of the country’s real economy, as well as the guarantee of the country’s credit. Therefore, market-oriented reforms of the RMB’s exchange rate and the RMB becoming an international reserve currency are both crucial links in a cycle, which will ensure the continuous and steady growth of the national economy, higher economic efficiency, and improvements in the country’s credit basis.
Yi Xianrong is a researcher at the Financial Institute of the Chinese Academy of Social Sciences.
