By He Fan (China Daily)
Updated: 2007-08-07 17:40

China made such a choice because the former arrangement of pegging to the US dollar might weaken China's flexibility in monetary policies. And it has also realized that an undervalued yuan will slow the industrial restructuring and cause vicious competition among Chinese exporters.

However, this reform is only part of a much bigger effort to upgrade the country's industrial structure. The exchange regime is not going to finish the task single-handedly.

First of all, the exchange regime reform is not a solution to tackle China's trade surplus. China's exports are mainly propelled by the processing trade, which is not sensible to the exchange rate. Even if the renminbi does rise dramatically, the processing trade is not going to drop instantly and the trade surplus may not diminish. Figures from Japan and China's Taiwan Province, where the processing trade used to dominate, have also indicated a lasting surplus in the case of an appreciation of local currency.

The exchange regime's reform will not put the lopsided industrial structure into balance by itself. Theoretically, a changing rate would help promote the development of industries that are not trade-orientated, in China's case, the tertiary sector.

However, China's tertiary sector was fledgling for multiple reasons, including inadequate supply of qualified talent and underdeveloped infrastructure. Such factors are not easily improved by the exchange regime reform.

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Therefore, an objective view about exchange regime reform is indispensable when people discuss the renminbi exchange rate.

The exchange rate equals a price between currencies in economic theories. Price is the key to allocating resources, which would bear remarkable significance for all resources in the market.

The Chinese government is determined to further this reform, but only according to its own blueprint. The greater target might be tarnished if the exchange regime reform is boiled down to the appreciation of renminbi. How much should the yuan be appreciated? How long will it rise? Similar questions should find their answers from the progress in related fields. No one can give definite answers before the progress is achieved.

It would be totally against the rule of the market economy when a country, through a political course, asks the Chinese government to change a key price in the economy. It is both unwise politically and unrealistic to ask China to realize the targets for its long-term reform in a short time.

The Strategic Economic Dialogue is a constructive innovation to eliminate bilateral misunderstanding, pinpoint the strategic issues of common concern and maximize the benefits of Sino-US cooperation. It may cost the chance of cooperation if the US insists on politicizing China's exchange regime reform and the political shortsighted doggedness will also lead to the neglect of more important issues.

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