Rumor has it that China's currency is about to appreciate. Chinese officials do not deny that they are studying the possibility of having the yuan's exchange rate determined by market forces. As China represents the world's fourth largest trading nation, as well as the sixth largest economy, the world is concerned about the impact the possible appreciation might have.
Since half of China's trade is based on processing, it is difficult to use general calculation models to estimate the impact. The impact on China's deflation and export competitiveness, in particular, has been severely overestimated. Speaking from the perspective of investing in China, Day Sheng-tung (
First, export processing accounted for 55.3 percent of China's total exports in 2002, and processed imports for 41.4 percent of total imports. Most of China's imported raw materials and semi-finished goods are processed in China and then exported again. Therefore, an appreciated yuan's impact on domestic prices is much smaller than the nominal increase. China has started to feel the pressure of inflation. Appropriate revaluation can solve the problem in a timely manner.
Second, almost half of China's imported raw materials or intermediate goods are for export processing. At the same time, its domestic materials and labor costs account for only 30 percent of the processed exports, and 50 percent of the total exports. Therefore, revaluation of the yuan will reduce the import costs, thus balancing part of the negative influence of an appreciated yuan on China's export competitiveness.
In fact, if the yuan appreciates by 15 percent, the price of the Chinese exports (calculated in foreign currencies) will either remain the same (50 percent x 115 percent + 50 percent x 85 percent) or drop by six percent (30 percent x 115 percent + 70 percent x 85 percent). It in fact makes China's exports more competitive.
Even in the worst-case scenario, an appreciated yuan has only limited impact on China's exports. According to UBS Securities, provided the export-exchange rate elasticity is set at 0.3 percent, revaluation of the yuan by 15 percent will lead to a 4.5 percent decrease in China's exports. In view of China's export growth of 22.3 percent and 34.6 percent in 2002 and last year respectively, a 4.5 percent decline would not have much of an impact on its total exports.
Third, previous experience shows that changes in the yuan's nominal exchange rate do not affect China's export competitiveness much. From 1992 to 1994, the Chinese yuan's nominal exchange rate stood between 5.5 yuan and 5.8 yuan against the greenback. The Chinese currency depreciated in 1994 to the level of 8.45 yuan per US dollar, with effective depreciation of 30 percent. The exchange rate remained around 8 yuan and 8.45 yuan between 1994 and 1996, and around 8.28 yuan between 1997 and 2003.
Fourth, Asian currencies are generally undervalued at present. A revalued yuan may result in the appreciation of other regional currencies, thus reducing the impact on China's export competitiveness. As of the end of last October, the yuan, the yen, Indian rupee and NT dollar were undervalued by at least 20 percent. The Korean won, Malaysian ringgit and Singaporean dollar were also undervalued by 10 percent to 15 percent, while the Philippine peso and Thai baht were undervalued by 5 percent to 10 percent.
Tung Chen-yuan is an associate research fellow at the Institute of International Relations at National Chengchi University.
Translated by Jennie Shih
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