Liu Yuhui: Is RMB Undervalued?

Two things have been interesting lately.

Geithner, US Treasury Secretary, said in February 23rd that China was unwilling to accelerate the renminbi.

Coincidentally, chairman Bernanke of the Federal Reserve is at the third time of the Central Bank of China.

According to the "Pakistan Lhasa Samuelson effect" in exchange rate theory, a country's rapid economic growth and rapid increase in labour productivity will raise the value of the country's currency (real exchange rate), reflecting the competitiveness of the country.

If the enhancement of the intrinsic value of the currency can not be shown in time from the nominal exchange rate appreciation, it will cause domestic price rises.

Briefly summarize an equation: real exchange rate changes = nominal exchange rate changes + inflation changes.

The situation in China seems to be responding to this change.

So it is easy for us to accept that inflation today is because the appreciation of the nominal exchange rate of RMB is not in place.

This is the logic of Geithner and Bernanke's opinion.

I know that many scholars in China firmly understand this.

Let's put aside the performance of the "Barcelona" effect in China for the time being.

In terms of the above "Barcelona" equation itself, there are two ways to curb inflation.

The policy on the right side of the equation is appreciation. The solution to China's inflation problem seen by Bernanke and Geithner lies in this.

The policy on the left side of the equation is actually to suppress domestic demand, in other words, to remove the "potential" of the appreciation of the real exchange rate. The slowdown means that the total credit scale needs to be tightened strictly, and the long-term interest rate should be lifted to curb the investment impulse and financial demand of the local government, and the economy must endure the throes of structural adjustment.

In the 90s of last century, Premier Zhu Rongji chose the latter.

The exchange rate is pegged to the dollar anchor, followed by a substantial increase in interest rates.

Inflation of up to 20% has finally achieved a "soft landing".

In my opinion, textbooks should be read through.

Choosing synonymous appreciation is the seesaw effect of Barcelona, instead of inflation.

But will the seesaw effect of Barcelona come to China in due course? It depends on whether the structure of the economy is enough to support the pfer of resources from the trade sector to the non trade sector after the nominal exchange rate appreciates, so as to rapidly enlarge the supply capacity of the latter.

The current structural problems beset China.

Finance, main pportation (from highway network to railway pportation, from aviation to ocean pportation, etc.), telecommunications, electricity, media and so on, are controlled by monopoly power, and private capital can not be involved or gathered.

The actual situation may be far from that. At present, the state sector relies on the "unprecedented advantage of factor resources and capital" condensed by the "anti crisis" policy. Private capital is also squeezed in the second industry.

Despite the introduction of the central government's "36 new public offerings", institutional reform is, after all, a long variable. I am afraid that the economic pformation is not yet clear. Inflation has become a big problem.

It can be imagined that the funds squeezed out of the entity may be further enlarged and fictitious, and asset bubbles will expand and deepen the pressure of price inflation.

If so, what is the purpose of the revaluation?

Obviously, we can not understand the "Barcelona" without understanding.

In the economic logic of Barcelona, which I know, in fact, there are corresponding conditions - free convertibility of money and free trade.

Obviously, this is problematic for the interpretation of China's economy, or is worth rethinking.

Under the condition of capital item control, currency non convertibility and trade barriers, the phenomenon of "internal depreciation and external appreciation" can be applied to the "Barcelona" law, which is simply explained by the appreciation of nominal exchange rate.

A scenario that can be envisaged.

What will happen if China immediately releases capital controls?

I went to Hongkong at the end of last year and bought a McDonald's hamburger package for 22 Hong Kong dollars, the same package in mainland China to buy 25.5 yuan, and the actual purchasing power of RMB has already been over 20%.

Or the renminbi's non convertibility and capital controls will be supported by today's nominal price.

If we now announce the restrictions on Renminbi and foreign exchange consumption and investment for domestic residents and enterprises, how will it be? Who will spend the price of Premium Apartment House in the vicinity of London City to buy ordinary commercial housing in the Fourth Ring Road of Beijing? Everyone will make a rational choice.

To some extent, the synonym for RMB overvaluation is RMB convertibility.

From the point of view of exports, China has obvious subsidies, which often increase much more than the exchange rate.

At present, the average tax rebate rate of China's exports is 13.5%.

Under the competition system of local governments, the invisible subsidy of other preferential policies such as taxes and land may be greater.

From the point of view of imports, tariffs are very high, especially for high-end consumer goods, such as automobiles and famous brand goods.

China's surplus does not reflect the true value of money to some extent.

In 2008, the re import of Chinese goods amounted to US $85 billion 740 million, making China the seventh largest importer. Due to the export tax rebate, processing trade, tariff upside down, and encouraging exports, the import of domestic goods increased significantly, which increased exports and imports, resulting in the waste of social resources such as logistics.

If these subsidies can be substantially reduced and tariffs can be substantially reduced, will there be such a big appreciation of the renminbi?

I question whether there is still a significant underestimation of under RMB 1:7.

Over the past 8 years, China's currency volume has risen from 18 trillion and 500 billion at the end of 2002 to 72 trillion in 2010, up 3 times. China's high-speed industrialization has driven the nominal economic aggregate to rise 2 times.

How much money did the United States increase during that period?

The M2 of the United States increased by 53%, while the US's most extensive currency M3 rose from 9 trillion to 13 trillion, an increase of 45%.

In the same period, the US nominal economy increased by 36%, and since the financial tsunami, the US domestic assets have shrunk by more than 40%, almost back to the level of 2000.

During this period, the yuan appreciated 23% against the nominal exchange rate of the US dollar.

The logic is understandable: China's capitalization and asset price revaluation can absorb excess money, so it appears that the dollar exceeds the renminbi and the renminbi shows a strong and appreciating value.

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The belief of many property owners today is that future assets can appreciate and price differentials will be available.

This is a simple motive for investors to ignore the value of housing.

Once this expectation starts to disappear, the result of the shaken belief is that the money flows out of overvalued land and real estate.

Once the sponge has become saturated and no longer absorbs water and even goes out of the way (the downward trend of asset prices), the yuan has been more than US dollars for many years, and will be "exposed to the surface", when the depreciation of the RMB will be inevitable.

Therefore, in this sense, the RMB assets and exchange rate are the same direction.

In short, in recent years, I have been emphasizing that the RMB exchange rate reform must be integrated with the structural adjustment of the domestic economy.

What is the first and the fastest? In 2005, the two sides broke away from the reform of the single armed forces, the structural reform is seriously absent and directly launched the nominal exchange rate appreciation valve. The announcement of the gradual appreciation road is actually equivalent to the invitation letter and mobilization order to "move money quickly to China". As expected, the trade surplus, foreign direct investment, and the hot money that invitations to share the RMB progressive benefits in China, the three trends merge, making China's currency liquidity incessant.

When the monetary policy instruments that contain liquidity are used to the limit, all the problems are even worse.

The solution must go beyond the RMB exchange rate formation mechanism itself. The issue of RMB exchange rate is only an inevitable result of internal imbalance in investment and consumption, rather than a cause.

Because the imbalance of international payments is essentially an internal macroeconomic problem, which depends on the national savings rate and investment rate, because they determine the international movement of capital.

The long-term imbalance between savings and investment is ultimately determined by the economic growth pattern of an economy.