Liu Ligang: Accelerating RMB Appreciation

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On February 4th, the Obama administration refused to confirm that China manipulated its own position in the Sino US trade.

Everything seems to be changing quietly.

After President Hu Jintao's visit to the US, the US side began to send some positive signals.

Linked to other events, such as the highest standard of courtesy received by President Hu Jintao during his visit to the United States, and China's generous signing of the $45 billion economic and trade bill with the United States, the interaction between China and the United States has gradually become better.

A closer look at the Sino US joint statement seems to be able to draw some other information.

In the 2011 Sino US joint statement, about the renminbi

Does this mean that a consensus has been reached between China and the United States on the issue of RMB exchange rate? If there is such a consensus in the market, then the accelerated appreciation of the renminbi may be in the balance.

The main argument against the appreciation of the renminbi is that a strong renminbi will have a fatal impact on China's exports.

The real example is that the RMB has continued to appreciate over the past few years, but China's exports are still growing at a high speed, and a stronger renminbi does not seem to have any negative impact on exports.

From the theory of trade chain, in the global division of labor, each economy basically found its own position in the "value chain". The influence of currency value is far less than that of wages, labor force and skills.

China's case is also not isolated. It is widely seen throughout Asia. In Malaysia, ringgit appreciated the largest in Asia in the past year, reaching about 10%, while Malaysia's exports still increased by 16.6%.

China's trade figures released in February 14th show that in the first month of 2011, China's imports and exports were much better than market expectations, up 37.7% and 51% respectively, of course. For a super economy like China, such trade growth is certainly not sustainable.

But it also shows that China's external trade environment is not as vulnerable as many people worry.

In fact, a Renminbi that does not appreciate or appreciates slowly may bring greater risks, but these risks are rarely mentioned.

For example, global commodity prices, especially the prices of agricultural products, have risen rapidly in the past few months. Due to the fact that international bulk pactions are priced in US dollars, and in the current situation of slow appreciation of the renminbi against the US dollar, almost all of China has "eaten in" such inflation, and this will plate into rising domestic consumer prices.

In this sense, the renminbi does not play a "regulatory role" that a currency should assume. Without the exchange rate adjustment, it means that all the pressure will be pferred to interest rate policy.

So in China's macroeconomic policy debate, the central bank almost demanded that the central bank raise interest rates, and the exchange rate seemed to "rise" to the US dollar at a pace.

From the perspective of policy formulation, this is not an optimal choice.

Another reason against the appreciation of the renminbi, which has been mentioned by many people and misunderstood by many people, is that the appreciation of the renminbi will bring large scale inflow of hot money, resulting in a large supply of money, leading to the pressure of inflation and asset bubbles.

For many people, this is a more correct view.

However, economists familiar with the monetary system should know that under the same capital inflow, the accelerated appreciation of the renminbi is not the same as that of the renminbi without the appreciation of the renminbi.

This is because the money supply of a country is calculated in the local currency. After the appreciation of the renminbi, the same dollar will be exchanged for less RMB, which will lead to a decrease in the circulation of RMB in the body.

According to this logic, the amount of RMB money supply has been reduced, and in fact, it has eased the pressure of the central bank's hedging.

The author has made such a simple calculation, if the RMB appreciation is 5%, the central bank's "external assets" will be reduced by about 991 billion 800 million yuan in the calculation of RMB, because the M0 of the basic currency is made up of "external assets" and "external assets". After the drop in "external assets", China's M0 also has a corresponding decline.

According to the money multiplier between China's broad currency M2 and M0, China's M2 will also fall by 4 trillion and 700 billion yuan, accounting for 6.4% of the total stock of China's current stock.

If we assume that the RMB will appreciate by 12%, our calculation shows that the M0 will drop by about 2 trillion and 400 billion yuan, and the decline of M2 will exceed 10 trillion yuan, which will account for 15.4% of the current money supply.

In this sense, the appreciation of the renminbi will reduce the pressure of money supply generated by capital inflow.

At the same time, it should be pointed out that the capital inflow in China is fundamentally due to China's optimistic economic prospects, and the appreciation of the renminbi is not a decisive factor.

It is time to allow the renminbi to appreciate faster.