Two years ago, the People's Bank of China announced that RMB will not keep a close watch on US dollar only. The transaction price of US dollar to RMB was adjusted to 1 dollar for 8.11 RMB.

Two years later, it is calculated as to exchange 1 dollar, the appreciation of RMB is more than 0.5RMB. The elasticity of RMB exchange rate is also strengthened continuously. The reform of RMB exchange rate brings Chinese foreign trades and international balance of payments with profound changes.

Since the reform of exchange rate, the growing rate of Chinese import and export appeared tendency of “one accelerating and one decelerating”, namely the export was decelerating while the import was accelerating. According to the data of import and export provided by General Administration of Customs, during these two years, the growing rate of Chinese export has been decelerating continuously, from 32.7% of the first half year of 2005 to 27.6% of the first half one of this year, decreasing by 5 percentage points. Meanwhile, the growing rate of import was accelerating gradually, from 14% of two years earlier to 18.2% of this year, increasing by 4.2 percentage points.

However, even so, the scale of favorable trade balance of our country continues expanding. The growth of favorable balance appears the tendency of “accelerative running”. The data show that in the first half year of 2005 the favorable trade balance of our country was nearly 40 billion US dollars. In the first six months of this year, this figure was up to 112.5 billion US dollars, which was 2.8 times of that of two years earlier. It promotes the remaining sum of foreign exchange reserve of our country to increases fast, from 711 billion US dollars of two years earlier to 1332.6 billion US dollars at present.

“It should be paid attention to that the too large favorable trade balances and too fast growing rate of foreign exchange reserve have been the main contradiction in affecting on Chinese international balance of payments.” It is reported in the “Report of 2006 Chinese International Balance of Payments” issued by the international balance of payments analysis team of State Administration of Foreign Exchange Control that the favorable balance of international balance of payments is the same as the unfavorable balance. Both of them are the expression of the unbalanced international balance of payments. If it is too large either favorable balance or unfavorable one, it will bring unfavorable effect on operations of national economy.

It is pointed out in the report that at present the favorable balance of international balance of payments of our country mainly comes from processing trade, which depends on foreign invested enterprises, has low technical content and is lack of self brands and core technologies. Meanwhile, the amount of potential exterior liabilities such as undivided profit and divided but not exchanged profit of foreign-invested enterprises is large. Once the future international financial market has big turbulence, the market expectation will reverse and cross-border capitals will flow out, which may aggravate the impact to the domestic market.

In addition, keeping relatively great favorable balance increases the complication of macro-control. The international balance of payments of our country has potential risks. The foreign currencies continuing to rush in China bring large amount of capitals to the domestic market and the mobility of domestic bank system is abundant, which increases the difficulty of currency control and will affect the flexibility and validity of macro-control directly. It affects the price stability in long-term as well as brings large amount of capitals to invest in fixed assets, real estate and stock market, which increases the pressure of investment rebound and assets foam.

Therefore, Wu Xiaoling, vice-president of Central Bank, pointed that the international balance of payments surplus keeping large scale has profound and complicated internal and external reasons. We cannot only depend on reform of exchange rate to be responsible for adjusting international balance of payments.

Central Bank pointed out clearly that the exchange rate has certain effect on adjusting international balance of payments. However, it is not enough that only exchange rate is responsible for adjusting. We should promote the mechanism reform in foreign trade, resource price, exchange control, labor guarantee and environment compensation in order to make all policies work together and fully exert the adjustment of market system.

“RMB exchange rate” entering Chinese common people's life gradually

July 23rd was the first trading day after the second anniversary of RMB exchange rate reform. The middle price of exchange rate of RMB to US dollar changed from 8.11:1 of two years earlier to 7.5642:1 of today.

Nowadays, the conceptions such as “RMB appreciation” and “RMB exchange rate fluctuating” are no longer strange for Chinese common people. On the contrary, the truth that purchasing ability of RMB is strengthened to some extent compared with foreign currencies has been entering the common people’s life.

“RMB appreciation is a piece of good news for me,” said Li Jing, a girl in Hong Kong Chinese University. “RMB appreciates compared with Hong Kong dollar. I hope that my parents have a chance to visit here this year. And I can directly spend RMB in some places here now. It is much more convenient.”

Certainly, for those that live in China for long-term, the exchange rate may be only a change in number. But for the students and tourists from China to the USA and Hong Kong, it may have great differences. After RMB appreciating, the equivalent RMB can exchange more foreign currencies than before. Thus it is much cheaper for shopping abroad.

Nevertheless, RMB appreciation doesn’t let everyone happy. Mr. Niu Yuchen went to work in the USA two years ago and was coming back to Beijing soon. He said, “I planed to save the money and buy an apartment in Beijing. I didn’t think that RMB appreciates to US dollar. And I heard that the house price in Beijing has increased much more than that of two years earlier.”

At present, the accumulated appreciation of RMB to US dollar was about 7%. Meanwhile, the Chinese house price has been surging. In May of this year, both the year-on-year increase and linked relative ratio of house sales price continued to rise in 70 medium and large scale cities in the nationwide. The increasing breadths of newly-built commercial house, second-hand house and non-domestic commercial house are all over 5%.

It seems that RMB appreciation has no relation with domestic house price rising. Actually, driven by RMB appreciating expectation, some foreign “profit-seeking” capitals made efforts to purchase RMB or RMB property, which also helped the domestic house price increase greatly.

RMB appreciation makes Ms. Liu Xueying, living in Fengtai district of Beijing, both worried and glad. She said, “In order to go abroad convenient, I always have some US dollars in my account. In recent two years, RMB exchange rate fluctuated and my loss is considerable. My daughter knew how to manage money. She bought some foreign financial products last year and has gained some money already.”

According to the data published by the People’s Bank of China, since 2005, Chinese foreign exchange savings deposit appeared the tendency of gradual decreasing. Many residents exchanged foreign currencies on hand into RMB. Meanwhile, from exchange rate reform, many Chinese banks presented foreign financial products in succession. The threshold of such products is relatively low and some of them have short period, which meet the mass requirements.

Indeed, continuous appreciation of RMB is a test for the residents or investors who have US dollars in hand. However, the RMB exchange rate fluctuating is an opportunity for foreign financial market. The fluctuation of foreign exchange market is smaller than that of stock and bond market. Therefore, adding “foreign exchange” into individual investment is helpful to reduce the risk.

China promoted reform of foreign exchange management system continuously and encouraged domestic capitals to go abroad, which is convenient for internal resident and institutional investors to “fossick” in the international securities market. In April of 2006, China began to promote qualified domestic institutional investors (QDII) to carry out offshore investment business and allow domestic institutions and individuals to consign domestic commercial banks for investing in offshore financial products.

In the first half of this year, China Banking Regulatory Commission (CBRC) has allowed bank QDII products to invest foreign stock market directly since May. CBRC and State Administration of Foreign Exchange (SAFE) issued documents to broaden the offshore financial space of trust company. China Securities Regulatory Committee (CSRC) pointed out in June that the fund corporations and dealers can invest in securities abroad. 

According to the statistics provided by SAFE, from allowing institutional investors such as banks to carry out foreign financial business to the beginning of this July, SAFE has already sanctioned an investment amount of 20.500 billion US dollars.

RMB appearing “split step” appreciation tendency during two years of exchange rate reform

July 23rd was the first trading day after the second anniversary of RMB exchange rate reform. From the exchange rate of RMB to US dollars, during these two years, the RMB exchange rate appeared tendency of “split step” appreciation and continuously creating new records.

During these two years, the middle price of exchange rate of RMB to US dollars increased from 8.11:1 of the exchange rate reform up to the highest point of 7.5636:1 in recent days. Compared with two years earlier, when exchanging RMB for 1 US dollars, 0.54 RMB will be saved.

At 19:00 of July 21st of 2005, the People's Bank of China announced to start mechanism reform of RMB exchange rate. RMB exchange rate will not keep a close watch on US dollar only in order to form more flexible RMB exchange rate system. Meanwhile, the exchange rate of RMB to US dollars increased by 2% for one time, namely 8.11 RMB for 1 US dollars, which would be the middle price of trade between assigned banks in the foreign exchange market in the next day.

Since RMB exchange rate reform, China insisted on the principle of activity, progressiveness and controllability in order to promote mechanism reform of RMB exchange rate steadily. The flexibility of RMB exchange rate is strengthened continuously. The tendency of two-way fluctuation appeared obvious progressively. The factor of market supply-and-demand plays a more and more important role in the formation of RMB exchange rate.

Generally speaking, exchange rate of RMB to US dollars has gone out of the slow appreciation. From the middle price of RMB to US dollars, it broke through “8” for the first time on May 18th of 2006. Then it broke through 7.9:1 on September 28th of 2006, 7.8:1 on January 11th of 2007, 7.7:1 on May 8th of 2007 and 7.6:1 on July 3rd of 2007.

RMB exchange rate appearing driving power of market supply-and-demand under the principle of steadiness

July 23rd was the first trading day after the second anniversary of RMB exchange rate reform. During these two years, the middle price of exchange rate of RMB to US dollars increased from 8.11:1 of the exchange rate reform up to the highest point of 7.5636:1 in recent days. Compared with two years earlier, when exchanging RMB for 1 US dollars, 0.54 RMB will be saved.

After reform, RMB exchange rate appeared tendency of “split step” appreciation and continuously creating new records. From the beginning of this year, the middle price of exchange rate of RMB to US dollars has presented driving power of market supply-and-demand more and more obviously. It broke through the integral crossing points of 7.8:1, 7.7:1 and 7.6:1 in succession.

In fact, since the mechanism reform of RMB exchange rate starting in 2005, China has been emphasizing on perfecting administrative fluctuating exchange rate system and actively exerting the fundamental function of market supply-and-demand under the principle of actively, controllability and progressiveness.

In order to further strengthen the flexibility of RMB exchange rate, Central Bank announced on May 18th of this year that the fluctuating range of trade price of RMB to US dollar was expanded from 3‰ to 5‰. It is the first time for Central Bank to adjust the range of exchange rate of RMB to US dollars since 1994.

After that, the fluctuating flexibility of RMB exchange rate was further strengthened and its interacting relation with international main currencies became more and more obvious. By July 23rd, the middle price of exchange rate of RMB to US dollars had increased from 7.6804:1 to 7.5642: 1.

The tendency of two-way fluctuation of RMB exchange rate was also obvious. It is indicated by data that from May 18th to July 23rd, there were 46 trading days in the spot foreign exchanges market among banks. Among them, the RMB exchange rate appreciated in 32 trading days and depreciated in other 14 days. The largest one day appreciation breadth of RMB exchange rate appeared on June 12th. On that day, the middle price of exchange rate of RMB to US dollars increased by 310 basis points compared with last trading day.

However, as a whole, “steadiness” is still the basic requirement in formation mechanism of RMB exchange rate. The steadiness of RMB appreciation has two meanings. One is to control the inflation, namely it should be stable for purchasing ability internally. The other is to keep RMB exchange rate stable on the reasonable and balanced level, namely it should be relatively stable externally as well.

Yi Gang, assistant of President of the People's Bank, said that “The target of implementing steady currency policies is to keep the currency stable. Keeping currency stable can promote and keep macro-economy increasing steadily.”

When Central Bank announced to expand the fluctuating range of exchange rate of RMB to US dollars on May 18th, the relevant principal of Central Bank emphasized that to expand the fluctuating range of exchange rate of RMB to US dollars was one system and construction measure to further perfect formation mechanism of RMB exchange rate. It is helpful to smooth the fluctuation of RMB exchange rate. It means neither large breadth of RMB exchange rate fluctuation nor large breadth of appreciation. Instead, it means to perfect administrative fluctuating exchange rate system and actively exert the fundamental function of market supply-and-demand under the principle of actively, controllability and progressiveness.

From another point of view, the large breath of RMB exchange rate fluctuation is not favorable for the development of Chinese economy. With the reform of exchange rate formation mechanism deepening, the flexibility of RMB exchange rate increases continuously. To strengthen the risk management of foreign exchanges market further has been the focus of system construction of foreign exchanges market since this year. VC funds system should be established and perfected in Chinese foreign exchange trading center to prevent and dissolve various risks that may occur.

Tan Yaling, financial expert of Bank of China, pointed out that if RMB exchange rate appears straight one-way fluctuation, we should be precautious to venture capitals speculating RMB maliciously. And the government should strengthen supervision and control. Recently, the relevant principals at Central Bank and SAFE emphasized that at present the supervision and control to the flow of transnational capitals should be strengthened, especially for those short-term capital flows.

The large fluctuation of RMB exchange rate may also bring external surge to our country. Economist Liu He pointed out that China is a main supplier of finished products. The fluctuation of RMB exchange rate will have effect on global price, while such effect will refract on China and bring pressure to Chinese economy, which protrude the problems of unemployment and over capacity.

Wei Benhua, deputy director general of SAFE, reviewed Asian financial crisis occurring ten years earlier recently and pointed out that the profound inspiration brought by this crisis is to implement liberalization of capital control by a steady and orderly mode. As to the problem of RMB exchange rate, he emphasized that China should insist on the principle of activity, progressiveness and controllability in order to promote the mechanism reform of RMB exchange rate steadily.