Renminbi Passes 7:1 Mark Against US Dollar
You may not have noticed this, but the Renminbi has now surpassed the 7:1 ratio to the US Dollar. Bank of China is now listing the official rate at 6.99:1. The symbolism of this barrier is more important than the actual change, but it shows the long trend that has significantly sped up, particularly this past fall, when the Yuan was as weak as 7.52:1 on November 1, 2007.
For about 10 years the rate was virtually fixed at 8.28:1, and a lot of people still mentally calculate prices at 8:1. The shift over the last few years has been something that the US has been advocating to shrink the yawning bilateral trade deficit, and the trend has not gone unnoticed by Washington. US Treasury Secretary Hank Paulson is currently in Beijing and commented on the rise of the Yuan.
Paulson again praised China for letting its yuan currency rise more quickly, a long-standing demand of the Bush administration.
The Chinese currency, also known as the renminbi (RMB), gained 4 percent against the dollar in the first quarter and has now risen 18 percent since July 2005, when it was depegged from the dollar.
“Although the process of adjustment is not complete, the accelerated pace of appreciation is significant and welcome, and should continue,” Paulson said in a speech to the Chinese Academy of Sciences.
A stronger exchange rate would help China to tackle inflation, now at a near-12-year high of 8.7 percent, he said.
In terms of real economic impact on a macro level, the rise of the Renminbi against the Dollar is not all that significant. US manufacturers have a hard time competing on price with their low-cost foreign competitors, particularly in China, and that will be the case regardless of how much the Dollar depreciates.
In reality, the extreme weakness of the Dollar against the Euro and Pound are probably more significant for manufacturers in the US. VW and Airbus both plan to open major factories in the US as a result of uncompetitive labor prices in Europe (although the latter decision is also partly due to Airbus winning a major US Defense contract).
So while in the big picture the appreciation of the Renminbi is probably small potatoes, it is good politically for US officials. Of course it does have a major impact on foreigners doing business in/with China (not to mention those of us earning salaries in RMB). And as we come out of the period of artificial valuation, the crossing the 7:1 line means that the Yuan is getting close to its “true” value against the Dollar, whatever that might be. Once we reach that point, it’s hard to imagine that a fully floating currency and the end to capital controls would not be soon to follow.
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ERIC responds:
Posted: April 5th, 2008 at 2:23 pm →
it is not really a coincidence that Henry Paulson should come when the RMB breaks 7.
it most definitely helps me paying for college!
nanheyangrouchuan responds:
Posted: April 6th, 2008 at 7:28 am →
“Once we reach that point, it’s hard to imagine that a fully floating currency and the end to capital controls would not be soon to follow.”
Only Beijing is going to decide that, and seeing as how they are so obsessed with controlling everything else, I have no doubt that there will be full hands on control of the currency exchange rate for the forseeable future.
Turtlewind responds:
Posted: April 7th, 2008 at 11:50 am →
A point that a lot of Americans miss is that the RMB isn’t actually rising against other major currencies - it’s still falling against the Euro, for example. The RMB’s appreciation is more than compensated by the falling US dollar, meaning that it is becoming even more undervalued than it was before.