March 1, 2004｜China
Executive Vice President, Matsushita Electric Industrial Co., Ltd.
Broadly speaking, there are four major factors contributing to the current pressure for revaluation: i) China’s high rate of economic growth; ii) its abundant foreign exchange reserves of around $400 billion (second only to Japan); iii) the fact that it has a strong export and import showing and maintains a trade surplus, while being the main factor in the trade deficit of the US; and iv) the expansion in direct investment in China from overseas.
Since October 1997, trade in the yuan against the US dollar has been in the range of 8.2760 to 8.2800 yuan, remaining stable and fixed under what is effectively a pegging against the dollar. In addition, there have been constraints, such as the fact that the conditions needed in order to build up a forward exchange market in the yuan have not been put in place.
Amid this situation, the pressure to revalue the yuan from countries around the world, including Japan and the US, has remained strong, but the Chinese authorities believe that they should maintain a stable yuan rate and have steadfastly rejected the idea of revaluation. Furthermore, they assert that China’s currency stabilization policy is contributing to the stable growth of the global economy.
With regard to the main impacts of a revaluation, on the positive side there is the likelihood that exports would decrease and imports increase, thereby correcting the trade imbalance. On the negative side, it is likely that China’s export business would be hit hard. At the same time, the market is already beginning to incorporate into itself a revaluation of the yuan. For example, the share prices of red-chip companies on the Hong Kong stock exchange have risen significantly of late. This has been described as a move that has taken place in the expectation that profits per share in Chinese companies will increase in foreign currency terms as a result of a revaluation. The Matsushita Group is also making preparations with such a shift in mind, building up cash reserves in yuan. At the same time, shifting the focus to the market, we can see that a rise in the value of the yuan would lead to an improvement in China’s purchasing power. Chinafs biggest attraction is its vast domestic demand. The potential market in China is immense. The business opportunities arising from the revaluation of the yuan are gigantic.
Looking at the situation in terms of the huge expansion in the economy, the yuan is undervalued and its value needs to be amended. However, as the degree of undervaluation is considerable, it is possible that its value would rapidly rise by a significant degree if attempts were made to adjust it over a short period of time, impacting the Chinese economy severely. Consequently, the realistic approach is to extend the margin of fluctuation progressively; more specifically, the margin of fluctuation against the dollar, which is currently extremely narrow at 0.3%, should be extended. In fact, it would be fair to say that the effect of a revaluation of just a few percentage points would simply fall into the category of an exchange rate fluctuation.
The Chinese authorities intend the yuan to become a hard currency in the future and, as the preparatory stage for this, the Chinese government is believed to be racking its brains not over the question “Should we revalue the yuan?”, but over the issue “What kind of exchange rate control system is preferable?” With regard to constraints on changes to the foreign exchange system, the biggest bottleneck is the fragile financial system. Major issues include solving the problem of non-performing loans held by state-owned commercial banks and easing restrictions on capital transactions; until these problems are solved, it will not be possible for unrestricted currency dealing to take place. Moreover, realistically speaking, it is unlikely that China will change its policy in response to external pressure. However, developments such as reductions in value-added tax refunds (a shift away from excessive export promotion) and in import duty (encouraging imports) have taken place and it is a fact that the government has formulated a succession of policies with the aim of easing the pressure on it to revalue the yuan.
The most desirable scenario would be for China to move towards reducing import duty, abolishing non-tariff barriers to imports, and increasing transparency, fairness and openness in the granting of import permits to international levels, which would result in a trend towards increased imports and a reduction in the size of its trade surplus. If, at the same time as this trend is beginning to emerge, the exchange rate band were gradually to expand, global trade could well be able to expand in a fashion that would be more orderly and cause the least disruption, both within China and internationally.
However, there is no mistaking the fact that the trend is toward a rise in the yuan in the medium to long term. It is expected that, if the yuan were revalued, Chinese industry – particularly its export business – would be thrown into chaos for a time; however, there is still adequate potential for further growth in the Chinese economy at present and there can be no doubt that it will continue to have the power to influence the global economy.
[Translated by ERINA]