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Beijing can dictate the exchange rates

  by Joe Zhang*

关于人民币的汇率, 我认为,
(1)它基本合理。合理的汇率是一个宽宽的区间(比如1美元对4元到8元人民币),而不是一个神奇的数字。
(2)中国政府有能力在一美元兑换4元到8元人民币这个宽宽的区间内,点到哪里就是哪里。它有能力想让汇率是多少,就是多少。世界上很少其它政府有这个能力。不过中国政府不愿意公开承认这一点。

It may sound like a ridiculous and risky idea, but I really think that Beijing can dictate the remninbi's exchange rates within a wide range of possibilities. That is, if it really wants to. For example, I think the People's Bank of China can set the renminbi's exchange rates anywhere between, say, 4 to 8 yuan to the US dollar. Currently, the market rate is 6.4 yuan.

Why do I think that Beijing has such an unmatched and enviable power to control China's exchange rates? To start with, its foreign reserves are probably three or four times more than are necessary. In the past decade or so, the rapid growth of foreign reserves has been a source of embarrassment and headache in China's political and policy circles. Critics often ask why a poor country like China should accumulate fiat notes issued by the U.S. Treasury and get paid very low interest rates in return. So, some major reductions of the foreign reserves in the next few years should be seen as a welcome change. If that process were to lead to a slower growth of money supply (and of bank credit), that would be even better for the central bank. Today, despite a continuing slow down in China's economy, money supply is still growing at a 13 percent clip. Given weaker inflation, real liquidity growth is probably one of the highest in the country's recent history.

Second, China has proven to be a strong export machine, despite the erosion of its export competitiveness. On the back of huge trade surpluses for a decade, the surplus has moderated in recent years. However, September's trade surplus of 60 billion US dollars was followed by 61 billion dollars in October - among the highest ever in the country's history. Perhaps one should not be too surprised by this sudden surge. If corruption-related consumption of high-end goods is truly reined in, if the import prices of commodities (oil, iron ore, etc.)were to stay low, and if the government's fiscal pump-priming remains subdued, we should expect China's trade surplus to surge in the months and years ahead. It is true that on a purchasing-power-parity basis, the renminbi is probably fairly valued (or even overvalued, as some argue) against major currencies, but in the near term and even the medium term, it is the demand-supply equation that will drive the exchange rate. And that equation is strongly biased toward a renminbi appreciation in my view.

Finally, and more importantly, the most crucial determinant of China's export competitiveness is not its exchange rate. It is the overall cost of doing business. Increasingly the biggest component of that cost is red tape. In the recent decade or so, Chinese businesses have been suffering escalating costs from dealing with the bureaucracy. So far, the new government has done little to tackle the layer upon layer of approvals, reviews, and harassments, and taxes are also historically high, despite the government's lip service to "structural reforms." However, if the government comes under intense pressure to cut red tape, it will. That should be more effective for stimulating export growth than mere tinkering with the exchange rates.

Even early this year, Beijing was still seen as a reformist government that could do no wrong. But its mishandling of the stock market severely tarnished its image, both at home and abroad. Never has a government action been watched so closely each day by so many people as Beijing's stock market intervention of 2015, and never has an action failed so spectacularly in the court of public opinion.

Right after that disaster, the government must have felt the need to do something positive for the economy. That urge led it to yet another miscalculation: tinkering with the exchange rate. Its thought process was probably like this: in the past decade, the renminbi has appreciated by over 20 percent against the U.S. dollar. Since all the emerging world's currencies have weakened against the U.S. dollar in recent years, it might be acceptable if China were to sneak in a little bit of catch-up or "rebalancing." But that unwarranted and unnecessary trick quickly caused a panic around the world, to Beijing's surprise.

Beijing has got the message loud and clear: given China's size, the country is not just another emerging market. It is in a class of its own. The world's expectation is for China to play the role of a stabilizer, just like in the Asian financial crisis of 1997-98 and the global subprime crisis of 2007-08.

Given China's ability to do what is expected of it, and possibly more, it is reasonable to expect the renminbi to stay unusually stable, and it may even strengthen in the next few years, contrary to the consensus forecast.

An equilibrium exchange rate (or a fair rate) is not a magic number but a range. A currency's trading outside its fair range - as long as the deviation is not extreme and does not continue for too long - is usually not a cause for concern. Now that capital outflows from China on the back of political concerns have probably run their full course, it is reasonable to expect a major shift of fund flows back to China.

The writer is the chairman of China Smartpay Group (8325 HK).

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