Trouble Brewing: People's Daily Defends Yuan Stability

The People's Daily published an opinion piece proclaiming the glory of the renminbi: 人民币是负责任的国际货币(财经问道)
Recently, under the impact of the UK off Europe and other issues, there was a certain degree of exchange rate adjustments. On the other hand, since the third quarter last year, driven by domestic industrial capital overseas mergers and acquisitions to accelerate, as well as the impact of the Fed rate hike, the RMB exchange rate volatility than in the past has intensified.

  However, gradually increase the RMB exchange rate flexibility, greater exchange rate fluctuation range, it is the policy-oriented in recent years, China's monetary and exchange rate system reform signified. And the history of other countries have experienced the process of "peg" system exit, the market will also parties to the future through a period of increased volatility of the yuan to gradually adapt to the times.

  Throughout the history of developed countries, the exchange rate of major international currencies, short-term 20% or even 40% of extreme cases currency fluctuations are not uncommon. Thus, in terms of volatility or central level, the recent trend of the yuan is not worth too much concern. Examine the direction and trend of the RMB exchange rate, still need to hold a longer period of historical perspective.

  After the 2008 global financial crisis, the central banks of major economies of the United States, Japan, Britain, Europe and other have launched unprecedented unconventional monetary policy, this extreme quantitative easing further exacerbated by the international financial market shocks. Such "beggar thy neighbor" policy clearly exposed the sovereign authority of the international currencies in a serious lack of maintenance of global financial stability responsibility.

  Considered as an effective nominal exchange rate, over the past eight years, the only large country major currency with no sharp depreciation was the renminbi, the effective exchange rate relative to a basket of currencies also remained stable. 1997 East Asian financial crisis swept Asia, many countries have to pass on the sharp depreciation of the currency crisis, currency depreciation in some countries even more than 50%, while the renminbi exchange rate remained stable.

  Although this altruism made its own economy suffered two years of deflation test, but China and it has won a "responsible power" of international acclaim. Today, the strength and international influence of China's economy has been much higher than 20 years ago, also have a greater determination and ability to promote the process of internationalization of the RMB, and will work to build a new, long-term reliable international reserve currency.

  After 30 years of domestic factor release, and then configure the system as well as the depth of integration into the global division of labor, China's economy has made achievements that attracted worldwide attention. Total domestic output accounts for only one-seventh of a strong global economy, for three consecutive years to become the world's new highest value of the country, and the total amount of foreign trade and exports also ranked first in the world. At the same time, nearly 20 years of continuous trade surplus and huge foreign exchange reserves to become strong internationalization of RMB strong backing. IMF will officially included in the SDR basket of currencies the yuan (SDR), making the yuan a global currency on the road has taken a crucial step. Not long ago, the first project of the Asian Infrastructure Investment Bank officially released, but also for establishing a key role in the RMB in the new international economic order to lay a new foundation.

  Throughout the growth of the world's major economies, China's huge economic vitality and potential can be described prowess. International economic order is undergoing a transition from the old one the largest since World War II, these factors have made the process of internationalization of the yuan to a critical juncture, and the world will usher in a more powerful and more responsible global currency.

 (The author is Associate Professor, Department of Nankai University International Economic and Trade)
China did a massive devaluation of the yuan in 1994, before the Asian Crisis. It didn't need to devalue; by some measure it was the first to beggar its neighbors. In 2008, China intervened in the market and did not allow the renminbi to devalue versus the U.S. dollar. The result was a massive credit binge in overvalued currency which has now brought about a witch's brew of instability.

China is right to engage in a "hard" currency policy to defend the value of the money, but it must also engage in hard monetary policy. Coupling easy money with a recalcitrant attitude towards the currency market is a recipe for disaster. The 1920s U.S. economy, with clear information signals, little in the way of regulation, the strongest and largest economy in the world, with good demographics and massive growth ahead of it, eventually experienced a 40 percent devaluation in the currency under better conditions.

If Chinese mandarins can adjust GDP like a home thermostat, then they can pull off a massive expansion of credit with no depreciation in the currency and no deflationary depression. If they can't, their currency policy will eventually move from tightly controlled, to total chaos, with the chaos directly proportional to the level of realized and theorized currency control over the past three decades.

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