Freer RMB movement 'can answer US claims'

Hastening financial reform and a freer pricing mechanism for the renminbi are possible responses to the United States' call for faster appreciation of the Chinese currency, experts said.

In a recent report to the US Congress, the Department of the Treasury said that China, along with other major trading partners, has "not manipulated" the exchange rate between its currency and the dollar.

The same conclusion was reached in the 10 previous reports issued since President Barack Obama took office in 2009.

The report acknowledged measures taken by China this year to loosen capital controls and free up channels for cross-border capital and investment, along with the establishment of the Shanghai free trade zone, which is expected to liberalize interest rates, capital account opening and currency convertibility.

But it insisted that "the renminbi is not appreciating as fast or by as much as is needed".

"The report is correct in that China does not manipulate its currency, but less so about the need for faster yuan appreciation," said He Weiwen, a co-director of the China-US/EU Study Center at the China Association of International Trade.

"Whether a currency is undervalued can only be tested by the market, not by the economic situation of another country," He said.

Although the People's Bank of China, the country's central bank, sets a reference rate for the renminbi on a daily basis, the real exchange rate is now mainly determined by massive renminbi trading in the domestic and offshore markets, he said.

The reference rate of the renminbi against the dollar was 6.1425 on Thursday, the fourth consecutive day that the renminbi had depreciated.

The renminbi has appreciated 12 percent in inflation-adjusted terms against the dollar since June 2010, when China moved off its peg against the dollar, and about 45 percent since China initiated currency reform in 2005.

The range of renminbi appreciation against the dollar was wider than the real effective exchange rate of the renminbi against the currencies of all relative trading partners, which has appreciated about 15 percent since June 2010 and 38 percent since 2005.

Chinese authorities reaffirmed their commitment this year to reforming the exchange rate mechanism.

At the fifth US-China Strategic and Economic Dialogue in July, China pledged to continue its exchange rate reform by increasing the flexibility of the renminbi exchange rate and letting the market play a bigger role in exchange rate formation.

China "needs to disclose foreign exchange market intervention regularly … and to promote exchange rate and financial market transparency", the US report said.

He Weiwen said that such statements about China are nothing new.

"It is merely eclecticism to maintaining good trade and economic relations with China but at the same time satisfying the Congress."

Under the Omnibus Trade and Competitiveness Act of 1988, the Treasury Department was asked to report "whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade".

"Facing such accusations, we could only focus on our own businesses, via pushing forward financial reform and market-led pricing mechanism of the renminbi," He said.

But Lu Zhengwei, chief economist of Industrial Bank Co, said the valuation of the renminbi faces a dilemma: The currency is already overvalued in domestic market, which weakens the real economy, yet still is under pressure by the US to appreciate.

A research note from UBS AG said that emerging markets have seen their currencies appreciate significantly against the dollar in recent years, but such a trend will not continue in the next two years.

UBS estimated the exchange rate of the renminbi against the US dollar will stabilize at 6.10 at the end of 2014 and 2015.