China's yuan reform Market confidence in yuan up

CNC report from Beijing
Added On August 12, 2013

In today's special program we speak to Larry Dongxiao Qiu, a professor at the School of Economics and Finance at the University of Hong Kong, about the yuan's appreciation and China's exchange rate reform.

The spot yuan rate closed at 6.1192 against the dollar on August 7.

That's the highest since the country unified the market exchange rates at the end of 1993.

And its appreciation does have repercussions.

SOUNDBITE (ENGLISH) LARRY DONGXIAO QIU, University of Hong Kong:
"I think it does have a big impact, because Chinese economy is an export-led economy, and (about 30 percent of the) the export, which is very high. So once you have this RMB appreciation for whatever reasons, Chinese export will be reduced, if this is the only case. And then that's going to affect the export. It's going to affect the employment amount, because the export sector in China is a labor-intensive industries (industry), right? So it's going to have a big impact on the employment in China."

The record-high level of the yuan spot rate has triggered speculation that the central bank is testing the waters for an imminent move to expand the yuan's trading range.

In April last year, the People's Bank of China widened the yuan's trading band against the U.S. dollar to 1 percent above, or below a daily reference exchange rate from its previous 0.5 percent limit.

SOUNDBITE (ENGLISH) LARRY DONGXIAO QIU, University of Hong Kong:
"The government keeps on having a tight control in the exchange rate market, and I think the direction is to make the exchange rate more flexible, the ranging more flexible. In that side, the fluctuation may be larger in the future. This may not be bad, because the market, actually if there's the fluctuation of the market, the exchange rate should also fluctuate."

The State Administration of Foreign Exchange says the country will steadily advance convertibility under the capital account.

Qiu suggests Chinese authorities should allow yuan funds to move freely in and out of the country.

SOUNDBITE (ENGLISH) LARRY DONGXIAO QIU, University of Hong Kong:
"First is open your capital cap, allow capital full mobility across the borders, and allow capital move in and out fully. And this is one thing you have to do. The second thing is that the domestic money market reform liberalization, like the interest rate marketization. These are the two things you need to do."

Qiu points out that as China gradually relaxes its capital account control, it could pose some uncertainties to the domestic economy.

SOUNDBITE (ENGLISH) LARRY DONGXIAO QIU, University of Hong Kong:
"If you look at the capital account, openness of the capital account, will you allow the capital to move in and out without controls? This is going to have a huge impact on the domestic economy. Sometimes you see (a) large capital(s) flux into the country. Sometimes you see them leaving the country. Too large amount. And this is going to create large uncertainties to the economy, which is China doesn't want to see. But yet, China has already been moving towards this direction step by step, for example, allow this QFII, QDII to move the capital in and out of the country. And so, although China is the second largest economy in the world, and being a large economy in such a time of fluctuation or increase and decrease in the capital inflow and outflow will not be a big problem for a large country, so this is a problem, but it's not the biggest problem."

Concerning the country's exporters, China's top economic planner, the National Development and Reform Commission, says the country needs to keep its currency exchange rate stable in the short term.

But Qiu says that in the long run there's no need to worry about exporters as they will adapt.

SOUNDBITE (ENGLISH) LARRY DONGXIAO QIU, University of Hong Kong:
 "But I don't think this is a big problem anymore. It was a problem in the past, because exchange rate appreciation, RMB appreciation or fluctuation is bad for exporters, but the Chinese exporters have already learned in the past 8 years about how to do business when they face the exchange rate fluctuation, and how to do business, how to increase the competitiveness when the RMB becomes stronger and stronger.  But if you look at the overall picture. And even though Chinese currency has appreciated by 28, 26 percent, but Chinese export's still growing very fast. So that means we don't really have to worry that much about the impact on the enterprises. The good thing is we have been given a long period of time to make an adjustment to learn how to play in the world market."