Why fuss over RMB depreciation?
- By He Weiwen
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E-mail China.org.cn, August 31, 2015
The sudden fall of the RMB exchange rate to the US dollar last week shocked the world stock markets and caused strong repercussions in world media. A number of Asian currencies including the Singapore dollar, Korean Won, Vietnamese dong and Malaysian ringgit fell immediately. The shock also extended to Africa as the South African rand was devalued. Wall Street Journal commented on August 17 that RMB devaluation had frightened Chinese African partners. US Senator Robert Casey has even urged the Obama Administration to label China as a currency manipulating country.
However, a more professional comment by Alan Greenspan favored the Chinese central bank's recent move, regarding it an active step toward a market-oriented exchange rate mechanism, during his speech at the Brookings Institution on August 17.
An Over-Valued RMB Finally Came to Its Real Market Value
Before the latest move, the People's Bank of China had set the daily parity rate for RMB at around 6.11 to the dollar for months. However, the actual exchange rate on the offshore exchange market was lower than 6.20, showing a clear over-valued official parity. On August 11, the Chinese central bank lowered its parity from 6.1162 of the previous day to 6.2298, or a straight 1.8% devaluation, based only on the actual market trading level of the previous day, which was around 6.22. The market fell again that day to below 6.30, showing the fact that the actual exchange value should be even lower. On the following day, the central bank set the parity rate at 6.3306, again based on the actual market value. The parity fell slightly further on the third trading day to 6.4010, and then quickly stabilized at 6.3915-6.3975 for the following five trading days until August 20, with an accumulative fall of 4.5% to the dollar, more or less reflecting the current RMB market level. It also shows that, the previous RMB exchange rates were overvalued, due to an inadequate market base.
As the RMB stabilized at a new level to the dollar, the world stock and exchange markets will most likely return to normal next week.
The recent RMB fall has been the result of a significant step forward in its exchange-rate formation mechanism, towards a fully market-based one, minimizing the policy distortion. Such has been the requirement of the IMF, and of the US government as well.
More a Dollar Issue, rather than a RMB Issue
The exchange rate to the US dollar, while serving as the benchmark for the RMB exchange-rate level, is not however, the official measurement of its devaluation or revaluation. The official measurement is RMB's real effective exchange rate (REER) to a basket of currencies, set by Bank for International Settlements (BIS). Over the recent years, RMB REER has been too high and could not be sustained.
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