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Financial Crisis and RMB Exchange Rate System
First, the financial crisis will not aggravate the criticism of the RMB exchange rate system.
Affected by the financial crisis, trade protectionism began to appear. During his tenure, US Treasury Secretary Timothy Geithner accused China of manipulating the RMB exchange rate, which is obviously different from the Bush administration's refusal to identify China as a currency manipulator. However, the main purpose of the United States at present is to get out of the financial crisis and get rid of the economic recession quickly, and the RMB exchange rate system arrangement will generally help the United States achieve this goal, at least it will not contradict this goal. Therefore, the new U.S. government should not take substantive actions against the RMB exchange rate system in the crisis. From the perspective of getting rid of the real economic recession, the sharp appreciation of the renminbi will not have a substantial impact on narrowing the trade deficit in the United States. At present, the global economic imbalance represented by the trade balance between China and the United States is rooted in the large savings gap (insufficient savings) in the United States and the large investment gap (excessive savings) in emerging market economies in East Asia, including China. From the perspective of global economic balance, East Asian emerging market economies with higher savings rates are collectively forced to maintain a trade balance relationship with the United States with lower savings rates. Obviously, this imbalance is rooted in the structural imbalance of the global economy, even though the RMB has greatly appreciated to the extent that China's trade surplus with the United States has greatly decreased. In view of the fact that the US savings rate is difficult to increase in the short term, its trade deficit will still exist, but it will only turn into a deficit with other countries. Since the late 1970s, the trade deficit of the United States has been increasing, but its trade surplus rival countries have changed from Japan to "Four Little Dragons of Asia" and "Four Little Dragons of Asia" in turn, and then to China.
From the perspective of getting rid of the financial crisis, the sharp appreciation of RMB is not the way out for the United States to solve the financial crisis. Recently, there is a fallacy circulating in western academic circles that the RMB exchange rate system is directly related to the subprime mortgage crisis in the United States. It is believed that the undervaluation of RMB exchange rate is the main reason for China's trade surplus with the United States, while China invested a large amount of accumulated foreign exchange reserves in US Treasury bonds, which depressed the long-term interest rate of the United States, and then the low interest rate stimulated the financial innovation of the United States, which made its financial institutions take excessive risks and eventually triggered the subprime mortgage crisis. A large number of facts show that the mismatch between financial development and risk perception is the root cause of the current financial crisis. Since 1990s, the financial innovation and development in the United States have been deepening. Although the awareness of financial risks has also improved in the same period, it obviously lags behind the needs of practice. The mismatch between financial development and risk perception greatly reduces the effectiveness of the original financial stability arrangement, which is closely related to the decline in the efficiency of internal control, market discipline and financial supervision of financial institutions. From this point of view, the subprime mortgage crisis is inevitable and has nothing to do with the RMB exchange rate system.
In fact, maintaining the existing economic model between China and the United States, including the RMB exchange rate system, is beneficial for the United States to resolve the financial crisis. At present, the US government has taken actions in the real economy and finance to solve the crisis. In the field of real economy, the United States mainly stabilizes economic growth through expansionary fiscal policies; In the financial field, the United States mainly stabilizes the financial system by rescuing financial institutions, buying toxic assets of financial institutions and providing liquidity to the market. The U.S. crisis resolution plan needs to spend a lot of money, which forces the U.S. government to issue a large number of national debt. Foreign investors play an important role in the investment demand of US Treasury bonds. In 2008, the US government issued 1.47 trillion US dollars of national debt, of which foreign investors bought 772 billion US dollars. The characteristics of Sino-US economic communication model are that RMB is "soft" pegged to the US dollar, China has a large trade surplus with the United States, and China holds a large number of US Treasury bonds, which helps the United States to raise funds and stabilize the national debt market. It should be said that the crisis has strengthened the "binding" of the economic model between China and the United States, that is, China needs the American market to achieve labor employment, while the United States needs our funds to stabilize its financial system. It is not good for China and the United States to undermine the stability of this model.
Second, the financial crisis will not fundamentally threaten the security of China's foreign exchange reserves.
After the outbreak of the subprime mortgage crisis, the security of China's foreign exchange reserves has aroused widespread concern among Chinese people. Some domestic scholars believe that the continuous injection of liquidity by the Federal Reserve into the financial system will pose a huge inflation threat to the future economic development of the United States, and China's foreign exchange reserves are likely to suffer heavy losses as a result, so the flexible reform of the RMB exchange rate system should be accelerated. In response to the crisis, the US monetary authorities have continuously relaxed monetary policy. The initial response of the Federal Reserve is to make the short-term money market interest rate consistent with the target level through more active reserve management. Subsequently, in order to alleviate the pressure of the conventional money market and repo market, the Federal Reserve extended the period of bank refinancing, expanded the scope of qualified collateral and counterparties, and expanded the scope of securities financing. In view of the continuous turmoil in the financial market and the recession of the real economy, the Federal Reserve quickly adjusted its monetary policy stance and lowered the federal funds rate from 5.25% to 0-0.25% in the short term. In the absence of room to cut interest rates, the Federal Reserve began to implement the so-called "quantitative easing" monetary policy, that is, monetary policy directly pays attention to the amount of money put in rather than interest rates. Judging from the money supply, there is nothing special about the above monetary policy operation. All the operations are that the central bank injects liquidity into the market through open market operations. When faced with inflation, the central bank can shrink liquidity by selling current national debt and other types of financial assets. What needs to be further explained is that in the United States, a country with a wide gap between the rich and the poor and a democratic parliament, it is impossible for the Fed to deliberately promote inflation in order to damage the value of China's foreign exchange reserves.
Financial liberalization in developed countries and financial reform in developing countries have stimulated the growth of speculative money demand and greatly eased the pressure of liquidity inflation on inflation. After the crisis, most of the global liquidity invested in the subprime mortgage crisis will not directly enter the real economy, and most of it is likely to change from a cautious state to a speculative state, which provides sufficient reaction time for global contraction liquidity. There is no need to adjust the structure of China's reserve currency. On the contrary, due to the large amount of China's foreign exchange reserves in the United States, any urgent adjustment of the monetary structure may damage the value of China's foreign exchange reserves because of the high transaction costs and the game reaction of the foreign exchange market. For example, if China quickly converts its US dollar treasury reserves into euro reserves, a large amount of selling will probably lead to a rapid increase in the yield of US dollar treasury bonds, which will lead to a decline in the discounted value of the US dollar reserves that China continues to hold. What's more, among the world's major reserve currencies, the security of the US dollar still ranks first.
Third, it is not appropriate to use the sharp depreciation of the RMB to get rid of the current economic contraction.
There is great controversy in the theoretical circle about the reasonable and balanced level of RMB exchange rate. A general view is that a reasonable and balanced RMB exchange rate level should be conducive to achieving balance of payments. Judging from China's balance of payments, the RMB should greatly appreciate. Maintaining sustained, stable and rapid economic growth is the fundamental goal of China's macroeconomic management, and all macro-control policies, including RMB exchange rate policy, must take this as the most basic starting point. In other words, a reasonable and balanced RMB exchange rate level should first be conducive to achieving the overall goal of national economic growth, and then consider balancing international payments.
Since the outbreak of the subprime mortgage crisis, China's economy has fallen sharply, and the growth rate of foreign exports and investment has dropped sharply year-on-year. Since the decline in investment is mainly caused by the decline in exports, this round of China's economic contraction can be classified as external demand-impacted economic contraction. In order to maintain economic growth, the Chinese government has timely and effectively introduced a proactive fiscal policy and a moderately loose monetary policy. In the field of exchange rate policy, China has not taken any major measures so far. Whether China should adopt the way of RMB devaluation to get rid of the current economic contraction is also an important issue to be considered in China's exchange rate policy.
According to the statistics of the World Trade Organization, the global real GDP growth rate dropped from 3.5% in 2007 to 1.7% in 2008, with the real GDP growth rates of North America, Central and South America, Europe, CIS, Africa and Asia dropping by 1.0%, 0.9% and 65440% respectively, except for the Middle East. The growth rate of global real commodity trade decreased from 6% in 2007 to 2% in 2008, among which the growth rate of real commodity exports in North America, Central and South America, Europe, CIS, Africa, Middle East and Asia decreased by 3.5%, 1.5%, 3.5%, 1.0% and1respectively. The overall shrinkage of global real GDP and real commodity exports shows that among all the reasons leading to the shrinkage of China's exports, the overall decline of the income of trade partners must rank first.
Under the exchange rate arrangement of RMB "soft" pegged to the US dollar, the US dollar appreciated sharply against the Japanese yen and the Euro in 2008, which indirectly pushed up the real effective exchange rate of China. It can be said that the relatively stable exchange rate of RMB against the US dollar during the crisis worsened China's terms of trade, and China now has the potential power to devalue RMB.
Although the relative stability of RMB exchange rate may have a negative impact on the stability of China's exports, it is still inappropriate for China to use RMB depreciation to get rid of economic contraction. The fundamental reason is that we are not sure whether RMB depreciation will have enough stimulating effect in the context of the global economic downturn and shrinking income of trading partners. On the contrary, historical experience tells us that the "beggar-thy-neighbor" devaluation of countries around the world during the crisis has never brought benefits to any country. During the Asian financial crisis, our government decided not to devalue RMB after comprehensive weighing. This decision was proved to be completely correct afterwards: it not only stopped the wave of competitive devaluation in Asian countries, but also enabled China's domestic production to obtain a stable external environment, thus taking the lead in getting out of the shadow of the crisis. It is also under the impetus of this decision that China won a wide international reputation and has since established the image of a responsible big country. Needless to say, China's decision not to devalue during the Asian crisis made China the biggest winner of that crisis.
While insisting on the stability of RMB exchange rate, China should pay special attention to whether the export industry has shifted during the crisis. One of our studies shows that in China, the vertical professional division of labor trade mode with the core feature of using intermediate products to produce final export products is accelerating, and foreign-funded enterprises occupy a dominant position in this trade mode, while China mainly obtains low-end labor factor income in this trade mode. The vertical professional division of labor dominates China's trade pattern, which means that China's foreign trade may be in a critical state. Once the external competitive environment reaches the level of offsetting China's labor cost advantage, a large number of foreign-led vertical division trading enterprises are likely to suddenly leave China collectively. Compared with the decline in exports, the threat of China's foreign trade diversion caused by the crisis needs more vigilance, because the decision of direct investment will not be easily changed because of the huge precipitation cost, and the international transfer of export industries will cause long-term fundamental damage to China's economic growth.