津上俊哉 現代中国研究家・コンサルタント

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Evaluating Renminbi Revaluation
CHIBA Hitoshi

※Author’s comments are displayed in italic

What are the likely repercussions for China, Japan, and for the region as a whole of China's recent renminbi reform? The Japan Journal investigates.

With the Chinese economy remaining robust or even somewhat overheated, starting in the fall of 2003 the United States and a number of other countries began to issue increasingly strident calls for a revaluation of the renminbi. Beijing has finally answered the calls.

On July 21, at 7 p.m. local time, the People's Bank of China raised the renminbi exchange rate some 2% from the fixed rate of 8.2765 renminbi to the dollar, and set a new rate of 8.11 renminbi to the dollar. On the next day, it introduced a currency basket system, under which the trends of other currencies are taken into account, to allow the rate to fluctuate within the range of 0.3% either way. It was the biggest change in the currency stem since January 1994.

On March 14, 2005, Chinese Prime Minister Wen Jiabao had commented (on currency reform) that Beijing would adopt an unpredictable method at an unpredictable time. Indeed, it was an unexpected reform that provoked a surprise reaction.

In the wake of this move, Federal Reserve Board Chairman Alan Greenspan remarked on a "good start," saying, "I look at it as the first step in a number of further adjustments as they [the Chinese] invariably increase their participation in the world trading markets." Nippon Keidanren (Japan Business Federation) Chairman Okuda Hiroshi also welcomed the reform, adding that the introduction of the new currency exchange system was made earlier than he had expected and that the rise in the renminbi's value was smaller than anticipated.

Particularly in a situation in which Japan and the United States see their trade with China growing, the climate could change dramatically depending on how much the renminbi is revalued. What was the reaction of Japanese home electronics businesses that have been running manufacturing and marketing operations in China?

According to a spokesperson from Matsushita Electric Industrial, one of the leading home electronics manufacturers, "It has a minor impact on us because we have two accounts in China, namely import and export. The amount of foreign currency assets we maintain is only the amount necessary for our operations, So from a medium- and long-term perspective we believe that it will have limited effect."

Matsushita also confirms that the revaluation will have no particular impact on the management of its local joint-venture affiliates with Chinese companies, given that they are run on a local currency basis.

Okamura Tadashi, chairman of another electronics giant, Toshiba, stressed that his company was in fact more interested in the impact on consumption in the Chinese domestic market, noting, "[Japan-based] companies have been endeavoring to avert the impact of the foreign exchange market since the Plaza Accord. They have a similar attitude on the renminbi. The renminbi revaluation has no impact on Japanese firms" (Nikkei Net, the online edition of the Nihon keizai shimbun, on October 6).

What is the view of the automobile industry, a key player in Japan's export engine? Koeda Itaru, chairman of the Japan Automobile Manufacturers Association (JAMA), said at a regular press conference on July 25 that most of the vehicles manufactured in China were for the Chinese market, although a small portion were for export and that the currency reform would have a minor impact (the Yomiuri shimbun on July 26,2005).

In answer to an inquiry I from The Japan Journal, a Toyota Motor Corporation spokesperson commented that the company's business in China was very limited, although it did make engine parts in Guangzhou, so the revalued renminbi would have no major impact. In mid-2006, Toyota is set to start manufacturing vehicles in the form of joint ventures, one with the FAW Group in Tianjin and the other with Guangzhou Automobile Group in Guangzhou. That will represent a major expansion of Toyota's business in China. Koeda suggested that Japanese automakers would not have to review their investment plans or change their China strategies, saying, "We can expect continued strong growth and we will continue to focus on China" (in the Yomiuri shimbun on the same date).

The reaction of Japanese companies is explained by Tsugami Toshiya, president of TOA Capital, who says that most Japan-based companies that export products from China had been prepared for a renminbi revaluation of up to 10%. He set up a roughly 100 million US dollar investment fund to boost investment between Japan and Greater China following a study on the Chinese economy by the Ministry of Economy, Trade and Industry and the Research Institute of Economy, Trade and Industry (RIETI).

Tsugami thinks the bigger impact is on Chinese firms. He points out that not a few Chinese exporters have been operating near or below break-even point, only making profits thanks to value-added tax refunds. Now they will be obliged to absorb the cost associated with the evaluation. He believes that the impact on these operators will be considerable.

■Japan's Experience as Neighbor

So how should Chinese companies respond for the next possible revaluation? Tsugami argues that China could learn from the lessons of its neighbor, namely Japan.

"It would likely have been easier for China to calm down its economy if it had revalued its own currency around 2003, when Chinese economic growth had yet to 'overheat.' In this respect, I feel that China has lost the best timing. Even after 2003, China's foreign exchange authorities must have intended to revalue earlier than they eventually did, but they did not do so for two reasons.

"First, after China missed the ideal opportunity the revaluation became an international political issue. Speculators on China emerged, and the circumstances for revaluation became unfavorable. Second, Chinese business was and is still against it. There were obsession-like fears that revaluing the renminbi would considerably damage the export industry and could slow Chinese economic growth."

It all makes for a case of deja vu; the same thing happened in Japan from the late 1960s through the early 1970s. At that time, the yen-dollar rate was fixed at 360 yen to the dollar. The need for adjusting the rate was argued mainly by academic researchers and economists. However, Japanese industry was occupied by the idea that a revaluation of the yen would be a matter of life or death for the Japanese export-led economy, and thus was staunchly opposed. As a result, the adjustment was delayed for years, which led to an overshooting of the yen exchange rate. In December 1971, the Smithsonian Agreement was reached and the yen exchange rate immediately jumped to 308 yen to the dollar, and it appreciated further to 260 yen in 1973.

Tsugami continues:

"China should also learn what happened to Japanese industry after the yen revaluation. The dollar shock caused huge pain for Japanese industry, but the need to cut costs triggered an industry restructuring and ended up strengthening Japanese competitiveness. Likewise, Chinese companies should not be so scared to face the challenge if they mean to be more competitive."

There is another reason why China needs to face the challenge. Current market intervention to stabilize the renminbi exchange rate is costly and entails a formidable negative by-product for the Chinese economy.

First, as a result of continuous market intervention, China's foreign exchange reserve has recently reached 769 billion US dollars, a figure that is expected to surpass Japan's sooner or later. A mere 2% renminbi appreciation last July brought about an exchange loss of 125 billion renminbi.

Second, the intervention needs to be associated with selling operations of bonds (sterilization) through which cash (the price of foreign currency paid by the authority) is called back to offset the unintended increase in money supply. For this, China's central bank has been issuing more than 3,700 billion renminbi of special short-term bonds (including those for carry over) to domestic financial institutions since 2003. This money might have been used for other purposes such as bank loans to grow small and medium enterprises.

■Following Revaluation

Another point critical to the future of renminbi reform lies in the adjustment of the renrninbi's fluctuation band under a new currency basket system. One month after this move, the renminbi was only 0.065% stronger against the dollar. This is said to be the effect of the currency basket.

Ito Takatoshi, a professor at the graduate school of the University of Tokyo and a fellow of the Research Institute of Economy, Trade and Industry (RIETI), argues that debates must be furthered with a focus on financial assistance after renminbi reform. He goes on to comment:

"Almost 50% of East Asia's trade takes place within the region. If exchange rates between countries within the region were stable and regional currencies floated in the same manner against the dollar and the euro, then trade, investment, and capital flows within the region would become more stable, benefiting the region as a whole. But if each country employs a different currency basket, this will lead to confusion. "In the medium to long term, if all East Asian countries were to employ a BBC (basket band crawl) based on a common basket of currencies, the regional exchange rate system would become extremely solid. China's dollar peg was a major obstacle to such enhanced regional monetary cooperation. With the obstacle removed, East Asian government officials responsible for exchange rate policy should deepen their discussions on monetary cooperation." (RIETI: www.rieti.go.jp/en/papers/contribution/ito/02.html)

On September 13, when Chinese President Hu Jintao held summit talks with US President George W. Bush in New York, he stated that China would endeavor to reduce its trade surplus with the United States and that Beijing remained determined to execute further renminbi reform.

On September 28, the Chinese government announced that the International Finance Corporation (Ei)n the World Bank Group and the ADB had become the first overseas enterprise and financial institution to win approval to issue renminbi -denominated bonds, called Giant Panda Bonds. Beijing commenced preparations for deregulation with the aim of setting up a domestic bond market and propelling the internationalization of the renminbi.

Tsugami adds, "The July policy package also includes establishing a renminbi futures market. Beijing meant to let FOREX trade participants become gradually accustomed to a more flexible renminbi exchange rate. Giant Panda Bonds can also be regarded as part of the grand project. "The recent 2% revaluation was not at all a pretense; we should not overlook China's determination. Given that the worrisome increase in foreign exchange reserves is continuing, from the perspective of the authorities the reform has not yet reached half way to its objective."

(The Japan Journal, DECEMBER 2005)