Pros and Cons of RMB Revaluation: Interests and Arguments of China, Japan and the United States

* This publication is in Japanese. An English translation is not available.

This book presents a set of diverse perspectives and analyses on the prospects for the RMB with Chinese, Japanese and American scholars examining the matter from various angles.

As the value of the U.S. dollar falls sharply against the Japanese yen and other major foreign currencies, the Chinese renminbi (RMB), which is effectively pegged to the U.S. dollar, is now undervalued. Indeed, with its trade surplus and foreign exchange reserves growing quickly, China is coming under intense pressure to revalue the RMB. The future direction of the RMB, including the possibility of China's shifting to a new foreign exchange regime, has attracted much attention both in China and abroad. Although the Chinese government remains cautious about taking any currency adjustment measures, both Japan and the United States are urging a revaluation of the RMB, accusing China of exporting deflation.

In this book, economists from China, Japan and the U.S. present diverse analyses and policy proposals for China's foreign exchange regime. Portions of the book are based on research papers presented at an international symposium held in Beijing on September 16, 2003 on the RMB problem, cosponsored by the Chinese Academy of Social Sciences (CASS) and the Research Institute of Economy, Trade and Industry (RIETI).

The book consists of three sections, focusing respectively on the Chinese, U.S. and Japanese perspectives on the RMB issue. Section I introduces research by the CASS Institute of World Economics and Politics (IWEP). Arguing against the official position of the government, which denies the necessity of RMB revaluation, China's leading international monetary experts call for an early departure form the dollar-peg system to a more flexible foreign exchange regime. In September 2004, IWEP director Yu Yonding, who presents a particularly strong argument in favor of RMB revaluation, was appointed to the Monetary Policy Committee of the People's Bank of China, China's central bank, stirring speculation among market players that the move may pave the way toward RMB revaluation.

Section II focuses on American perspectives on the RMB. Leading economists who have been actively involved in policy debates - Lawrence D. Lindsay, former adviser to President George W. Bush on economic policy; Barry Bosworth, senior fellow at the Brookings Institute; and Ronald McKinnon, professor at Stanford University - raise objections to Washington's official prodding of China to revalue its currency.

In Section III, which highlights Japanese perspectives, Haruhiko Kuroda, professor at Hitotsubashi University, special advisor to the cabinet, and former vice minister of finance for international affairs; and C. H. Kwan, former senior fellow and now consulting fellow at RIETI, present their views. For different reasons, they both argue a moderate and gradual appreciation of the RMB would be beneficial to China.

The ongoing debates over the RMB center on three major questions: (1) whether and to what degree RMB is undervalued at the moment; (2) the plusses and minuses of revaluation and whether they justify such a change; and (3) whether and how the foreign exchange system should be altered along with the exchange rate, assuming such a currency adjustment occurs. The situation can be described as "100 schools of thought contending," with opinions differing not only among policymakers but also among researchers in each country. These differing opinions among scholars reflect differences in perceptions of China's internal and external situation, or in interpretation of economic theories, rather than their representing the view of a particular government or interest group.

Surprisingly, the views presented by the American economists in Section II of this book are the closest to those of the Chinese authorities. In particular, Mr. Lindsey's argument based on the so-called Washington Consensus, which stresses market fundamentals, concurs with the view of the Chinese authorities in that they both believe preconditions for the RMB to shift to a flexible exchange rate mechanism have not yet been met. Meanwhile, the analysis by Professor McKinnon et al. on the relationship between the expectations for appreciation of the yen and deflation in Japan - the syndrome of the ever-higher yen - provides a theoretical foundation for the Chinese authorities' reluctance to revalue the RMB.

On the other hand, the Chinese views presented in Section I and the Japanese views in Section III have many similarities. They recognize the need for China to revalue the RMB and alter its foreign exchange regime, and they believe that China should adopt a managed floating system using the "basket, band and crawling" (BBC) method while maintaining control over capital flows. This prescription is based on the presumption that exchange rate adjustment is an effective means to correct external imbalances and that the Chinese government can effectively control capital flows.

With the growth of China's presence in the global economy, debate over the issue of the RMB is expected to continue. Although no consensus has been achieved, this book may help sort out some of the key arguments over the issue.

C. H. KWAN