RMB Revaluation Will Test Taiwan Exports
China Times editorial (Taipei, Taiwan, ROC)
June 22, 2010
This weekend the Group of Twenty (G20) Summit will be held in Toronto, Canada. On the 19th, the Bank of China (PBOC) announced that it would take another step toward the formation of a RMB exchange rate mechanism. The RMB would no longer be pegged to the U.S. Dollar. This policy statement was interpreted as a positive response to international calls for the upward revaluation of the RMB. It may help resolve Sino-US trade tensions. On Monday the RMB rose sharply against the dollar. It closed on a new high, the highest since July 2005. Asian currencies and stock markets rose in tandem. The US and the EU are certain to return to a floating exchange rate mechanism.
The PBOC stressed that the RMB will be pegged to a basket of currencies, rather than the USD. The RMB would not be revalued upward in a single move. The RMB is currently not subject to sharp fluctuations. This statement clearly shows that the RMB will not be revalued abruptly in a single move, and will not be subjected to floating range trading practices.
During the September 2008 financial crisis Asian currencies plummeted one after the other. The Bank of China pegged the RMB to the dollar, and played a key role in ensuring stability. Since the beginning of this year, international pressures for the upward revaluation of the RMB have increased. News reports note that in early April the Beijing authorities undertook exchange rate reform. They intend to allow the RMB to float periodically. A second earthquake and the European debt crisis forced the postponement of these reform measures until the end of June.
The Beijing authorities have always adopted a hardline attitude in response to international calls for RMB revaluation. They have always said that the yuan is a Chinese currency, and must not be the target of irresponsible remarks by the international community. The current PBOC statement stressed that RMB exchange rate reform would help fluctuations remain within a controllable range, consistent with mainland China's economic fundamentals and macro-control needs, and that it would adopt a gradual approach. The current change will help mainland China's balance of payments, and is not directed at bilateral trade issues with any particular country.
The market believes the new wave of RMB revaluations will not be too large. This year the RMB rose 16.5% against the Euro. This has seriously eroded the profitability of mainland China's exports to Europe. New York University economics professor Nouriel Roubin thinks if the Euro continues to weaken after the RMB adopts floating range practices, that it may need to be devalued. According to a Bloomberg News survey, RMB Exchange Bank personnel expect it to appreciate about 1.9% before the end of the year
It is generally believed that the return to a floating range RMB exchange rate mechanism demonstrates mainland China's confidence in an economic recovery. For the mainland, it will help contain inflation and promote economic restructuring. The appreciation of the RMB will be conducive to industries keyed to domestic demand. Airline and metal stocks in particular have soared, and people's purchasing power has increased. Upward revaluation will also improve the standard of living. Internationally, RMB revaluation will reduce the imbalance in global trade, in particular under-consumption in the United States and Europe. The United States hopes the mainland Chinese domestic market will play a balancing role.
Observers have long expected a revaluation of the RMB. But Foxconn is being battered by waves of wage increases. The revaluation will have a considerable impact on mainland China's export-oriented businesses, as well as Taiwan businesses on the mainland. The PBOC statement stressed that reform will promote industrial upgrading, reorient the economic development model towards domestic demand, and shift export industries from simple processing to advanced processing and finishing. Reform will help employees shift from manufacturing jobs to service jobs. This statement clearly shows that Taiwan businesses can no longer rely on export-oriented exchange rate advantages to earn a modest profit. They must make a full commitment to transformation and upgrading.
Consider the upward revaluations of the NTD between 1986 and 1989. Shoes, umbrellas, sunglasses, household appliances, textiles, and other industries gradually moved to the mainland in search of low cost labor and land, and established a whole new realm on the mainland. Between 2005 and 2008, the RMB rose 21% against the USD. Mainland wages rose, and environmental conditions improved. Taiwan businesses moved once again, this time to Vietnam, Indonesia, and Southeast Asia. Over the years, Taiwan businesses have used mainland China's vast low-wage labor resources and favorable exchange rates to create numerous OEM miracles.
Now, a new wave of RMB revaluation, however modest, means that mainland China has begun changing its industrial structure. An increased emphasis on domestic demand will test export-oriented Taiwan businesses. They will face pressure to move upmarket. Only by adding value can Taiwan businesses prevail. OEM industries must make the transition to branding. The road may be hard, but computer industry success stories include Acer and ASUS. Only by developing one's brand, can one integrate one's resources in the production chain. Otherwise one will be forced to offshore once again in search of lower wages.