"RMB Undervaluation" Is Exaggerated.

The Treasury Department of the United States has expressed concern about the P.

In a report submitted to the US Congress in April 15th, the Ministry of Finance said the renminbi was seriously undervalued and urged the Chinese government to return the RMB exchange rate to a level of equilibrium.

The Ministry of finance also warned that if the recent trend indicates that China's policy of marketization of RMB exchange rate has regressed from the previous announcement, it will be particularly concerned.

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< p > perhaps RMB is undervalued.

But without the intervention of the Central Bank of China in the foreign exchange market, especially since the intervention since mid February, the renminbi will obviously be stronger than it is now.

China's central bank increased its foreign exchange reserves by 510 billion US dollars in 2013, setting the highest single annual growth rate.

In the first quarter of 2014, the central bank bought another $120 billion, bringing the total foreign exchange reserves to nearly $4 trillion.

Increasing foreign exchange reserves will artificially bring us dollar demand and hence lower the value of the renminbi.

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P, the US Treasury and other agencies believe that this approach is one of the measures to boost China's recent sluggish growth in gross domestic product (GDP).

However, this may not be the central goal of the Central Bank of China.

In fact, the central bank may only be preparing for the liberalization of deposit rates at the end of 2015.

At that time, the deposit interest rate ceiling will be abolished, and commercial banks will be able to decide their own interest rates according to the supply and demand situation.

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< p > liberalization of interest rates or interest rates in China has risen sharply.

At present, China's benchmark interest rate is between 0.35% (current deposit interest rate) to 4.75% (five year deposit interest rate).

Market factors will raise these interest rates to the level of yield of China Banking (601988, stock bar) financial products.

These financial products are not controlled by the central bank. Their average yield is 4.7% (maturity less than one month) to 6% (maturity over one year).

The lending rate that has already been released will also rise at that time, because banks will shift the rise of costs to borrowers.

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< p > such a large increase in interest rates will seriously impact a href= "http://www.91se91.com/news/index_cj.asp" > China's economy < /a >.

The main beneficiaries of the current interest rate mechanism will suffer heavy losses.

The private sector will also suffer because the rising interest rate of state-owned banks will further push up the informal credit interest rate which is at a high level.

The residential real estate market may be particularly vulnerable.

As interest rates rise, families may store their money in banks instead of investing in new homes or apartments.

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< p > the Central Bank of China needs to relax the "a href=" http://www.91se91.com/news/index_cj.asp "monetary policy" < /a > to alleviate the tightening effect.

The central bank can mainly use two kinds of monetary policy tools to increase the money supply: directly buying the US dollar or reducing the reserve requirement ratio of banks.

The purchase of the US dollar will generate a large amount of new money supply, because the central bank needs to issue new Renminbi to pay for its purchase of the US dollar.

The lowering of the deposit reserve ratio will release the funds used by banks to make loans, which will increase the total amount of loans in the whole economy.

No matter what monetary policy tools the central bank chooses, the renminbi will undoubtedly face downward pressure as the supply of RMB increases compared with the US dollar.

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< p > if China's a href= "http://www.91se91.com/news/index_cj.asp" and Treasury officials /a urged officials to allow the RMB exchange rate to be determined by the market, then the Central Bank of China needs to stop buying the US dollar completely.

If other conditions remain unchanged, the yuan will go up.

However, other factors are not static.

In fact, in order to achieve the same effect as the rate cut, the rate of deposit reserve ratio should be lower than the rate cut.

As a result, market forces will push the RMB exchange rate down rather than higher.

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In fact, the P does not really have a balanced value, although the US Treasury wants it.

As the late British economist Joan Robinson pointed out in 1947, almost any exchange rate is balanced for certain economic conditions.

But the economic situation is always changing, so as Robinson said, the equilibrium exchange rate does not exist.

The renminbi is a case in point.

In order to stabilize the impact of liberalization of interest rates on deposits, monetary policy is needed to relax. In this process, the realization of a balanced exchange rate may lead to a weakening of the renminbi.

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The US Treasury should be cautious: the adjustment they advocate may lead to further devaluation of the renminbi, which is precisely what the US government would not like to see. P

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