Article/Liu Mingyan, columnist of Sina Financial Opinion Leader Column (WeChat official account kopleader)
The RMB exchange rate sticks to the market psychological defense line of 7, showing the world that China is determined to maintain the stability of the RMB exchange rate, which is conducive to the stability of foreign investment and avoids the impact of capital flight.
The issue of the RMB exchange rate has always been controversial because of its complexity. Recently, there has been a dispute about whether it is necessary to keep the RMB/US dollar exchange rate at 7. Some scholars believe that 6.9 is not materially different from 7.1, and the RMB exchange rate is not necessary to keep at 7. They believe that emphasizing on keeping at 7 will bring unnecessary panic to the market and unnecessary pressure to the management. But facts speak louder than words. On October 31, when the RMB hit a new decade low of 6.9771 against the US dollar and was one step away from breaking through the important psychological defense line of 7, the RMB exchange rate against the US dollar soared 1.2% to 6.8907 on November 1 and 2, making the market's expectation of the RMB exchange rate breaking 7 instantly reverse and successfully defusing the panic of the sharp depreciation of the RMB again. Therefore, the author believes that the important psychological defense line of keeping the RMB exchange rate at 7 is far-reaching and not insignificant. The brief reasons are as follows.
At present, China's foreign trade still maintains a large surplus, indicating that the RMB exchange rate is at a reasonable level and there is no objective demand for a substantial depreciation. Data shows that in the first three quarters of this year, China's trade surplus was $220 billion. Although it narrowed year-on-year, it still maintained a large surplus in the context of Sino US trade frictions, indicating that China's exports still have strong competitiveness at the current level of the RMB exchange rate. Some people think that the devaluation of the RMB exchange rate is a way to hedge the impact of Sino US trade frictions, but this is obviously not a comprehensive consideration, nor is it necessary in the short term, because the impact of currency devaluation is all aspects, and it is not advisable to focus only on the trade surplus, because China has maintained a long-term trade surplus and accumulated a surplus of more than $4 trillion, Even short-term deficits should be tolerated, let alone the reduction of trade surplus.
The RMB exchange rate sticks to the market psychological defense line of 7, showing the world that China is determined to maintain the stability of the RMB exchange rate, which is conducive to the stability of foreign investment and avoids the impact of capital flight. The exchange rate of emerging market countries such as Argentina and Brazil in South America frequently collapses, which seems to stimulate exports on the surface. However, because emerging market countries rely heavily on foreign capital, the first consequence of exchange rate collapse is the escape of foreign capital. After the loss of foreign capital, the economy will be severely impacted, which will further aggravate the depreciation of exchange rate and the deterioration of trade. For China, if the exchange rate depreciates suddenly, the consequences are likely to be the same. The data shows that since 2002, China's actual use of foreign direct investment has reached 1.5 trillion US dollars. If investment profits are added, the balance of foreign direct investment will certainly exceed 2 trillion US dollars. If the RMB exchange rate depreciates suddenly, it will inevitably lead to the loss of foreign capital, which is likely to offset the benefits of trade surplus, and even lead to the reduction of trade surplus, Because a large number of Chinese exporters are foreign capital and joint ventures.
Maintaining the stability of the RMB exchange rate can avoid the impact of imported inflation and help maintain the stability of prices. In September, CPI rose 2.5% year on year, which is at a high level in the year, indicating that China's inflation pressure is rising. At present, China's economic growth is in a downward trend. If prices continue to rise, stagflation will result. Data shows that in 2017, China's total imports amounted to US $1.84 trillion, equivalent to more than 12 trillion yuan. If the RMB exchange rate depreciates significantly, the price of imported goods will rise significantly, especially the price of crude oil imports, which will lead to cost driven inflation, further aggravate the depreciation of the exchange rate, and lead to a vicious circle of the economy, This is obviously what everyone does not want to see.
Maintaining the stability of the RMB exchange rate will not have an impact on foreign exchange reserves, and allowing the RMB to depreciate will really impact foreign exchange reserves. At present, China has the largest foreign exchange reserves in the world, about 3.1 trillion US dollars. The current view is that we should abandon the exchange rate and protect the external reserve, that is, let the RMB exchange rate depreciate and ignore it even if it breaks seven. As long as the external reserve is not lost, they believe that the exchange rate is just a price, and the external reserve is the real gold and silver. It is not worth the loss to spend precious external reserve to protect a price sign. This view seems to be correct, but in essence it is totally wrong. First of all, one of the purposes of holding foreign exchange reserves is to maintain the stability of exchange rate. If the exchange rate is impacted and holding a large amount of foreign exchange reserves is ignored, it will be a waste of foreign exchange reserves, and ultimately the depreciation of exchange rate and the loss of foreign exchange reserves are inevitable. Because once the exchange rate depreciates significantly, it will inevitably lead to market panic and capital flight, and then the external reserves will also be exhausted. China's current deposit balance is up to 160 trillion yuan, while the external reserves are 3.1 trillion dollars, about 21 trillion yuan. Obviously, as long as 13% of the deposit scale capital outflows, the existing external reserves will be exhausted, unless strict capital control is implemented, The latter will destroy the good situation of reform and opening up. And maintaining a stable exchange rate can stabilize market expectations, avoid capital outflows, and ultimately achieve a steady increase in foreign exchange reserves.
In short, we believe that at a time when the prospect of Sino US trade frictions is unclear and the domestic stock market is still fluctuating, it is obviously unwise to allow the RMB exchange rate to depreciate again. The current trend of the RMB exchange rate is a strong criticism of the idea of abandoning the exchange rate to preserve foreign reserves. However, the cornerstone of long-term stability of the RMB exchange rate is the strong growth of China's real economy and the maintenance of foreign trade surplus. If the downward trend of economic growth and the narrowing trend of trade surplus cannot be reversed, even if the exchange rate maintains the psychological defense line of 7 in the short term, long-term depreciation will be inevitable. Therefore, consolidating the foundation of the real economy is the key to stabilizing the RMB exchange rate, It is suggested to firmly implement President Xi's instruction of "lightening the burden of taxes and fees on enterprises" at the forum for private enterprises, significantly reduce the social insurance rate and value-added tax rate of enterprises, reduce the social insurance rate from 40% to 20% of wages, so that the social insurance expenditure of enterprises will not increase, and at the same time, reduce the value-added rate by about 3 percentage points, and truly eliminate all kinds of unreasonable charges, The management cost of the whole society will be reduced from broad fiscal revenue (tax revenue+social security revenue+land transfer fee+state-owned capital income) to about 30% of GDP from 44%. Only in this way can China's manufacturing industry be competitive internationally, and enterprises can accumulate capital for product upgrading and technological innovation. Otherwise, the advantage of low labor cost brought by demographic dividend will gradually disappear, In the absence of high-tech industries and developed financial markets, China may fall into the disadvantage of manufacturing hollowing out. On the contrary, if drastic tax cuts are implemented, China's manufacturing industry will usher in the spring of vigorous development, consumer spending will increase significantly, and China's economic growth will resume rapid growth, truly ushering in a new economic cycle.
(The author of this article is a researcher at the University of International Business and Economics. He works for China Minsheng Bank.)
