Deciphering China’s Numbers: Exchange Rate and Hot Money
Deciphering China’s Numbers: Exchange Rate and Hot Money

A business man walks past a RMB (renminbi) poster outside the Bank of China in Hong Kong on Sept. 5, 2011. (Laurent Fievet/AFP/Getty Images)

The Chinese renminbi (RMB), also known as the yuan, was valued at 6.3198 to the U.S. dollar in China’s foreign exchange spot market on Dec. 27, 2011. This is an 18-year record high since China introduced exchange rate reforms in 1993. At the same time, hot money is said to be fleeing China at an accelerating pace.

Many analysts are pointing out that China’s hot money is running out. Pessimistic about China’s economic outlook, international hot money outflow from China is accelerating, in spite of Chinese leaders having tried to attract and retain it by appreciating the RMB, according to Chinese economist Qi Yanchen.

In October and November of this year, China’s new RMB equivalent of official foreign exchange holdings has experienced consecutive negative growth, pointing to a net outflow pressure. With concerns over large amounts of capital flowing back to the U.S. and Europe, coupled with an expected decline of China’s macroeconomics growth, and other negative factors, an RMB devaluation is expected.

Fake Foreign Investments

In her recent article, “Who Introduced Speculation in China? Comments on China’s Real Estate Market,” prominent Chinese economist He Qinglian exposed the inside story about China’s hot money. She said for a long time a large portion of foreign investment in China was fake foreign investment. In actuality it was capital transferred to overseas entities established by Chinese individuals or companies and registered in foreign countries, then reintroduced into China as “foreign investment.”

What exactly is the ratio of fake foreign investment to total foreign investment in China? According to the statistical figures cited by “China Statistical Yearbook 2009,” investment from Hong Kong, Macao, Mauritius, Bahamas, Barbados, the Cayman Islands, the British Virgin Islands, and Western Samoa constituted 69 percent of total foreign investment in 2007. In 2008 the number was 71 percent.

Currency Appreciation and Exports

For years, the U.S. and many of China’s trading partners have complained that Chinese regime leaders have kept the RMB artificially low to help the country’s exports. Beijing has repeatedly resisted international efforts to resolve these issues at international forums by saying it will handle currency-exchange issues in “its own time and way.”

Since Nov. 30, the selling side of RMB has increased significantly. The spot rate for 12 consecutive trading days reached, or nearly touched, the lower range of 5 percent median price. The appreciation of the RMB as a whole still keeps slowly upward, even though the Chinese Central Bank has made “adjustments.”

Overall, the 2011 median price of the RMB to the U.S. dollar has maintained an upward trend. Starting on Jan. 4, 2011 with one dollar being equivalent to 6.6215 yuan, and ending on Dec. 27 with 6.3152, or 4.63 percent, the appreciation is close to the expected annual rate of 5 percent.

China has long enjoyed a favorable foreign trade balance as a consequence of exporting substantially more than importing, Professor Frank Xie from the University of South Carolina Aiken School of Business, said.

But China’s export is also one factor driving the RMB to appreciate. More exports result in greater trade surpluses, and as China earns massive foreign exchange reserves, Chinese manufacturers have to pay production costs, including labor, rents, and energy costs, thus the need to convert foreign currencies to RMB, and consequently higher demand prompts appreciation of the RMB. Appreciation of the RMB should be viewed as an inevitable outcome from the perspective of normal economic conditions, Professor Xie said.

However, the appreciation of the RMB will impact China’s export industry, economist Qi Yanchen said. Prices of export products will go up, making them less competitive in the international market.

Economics professor Hsien Ping (Larry) Lang recently predicted a 20 percent appreciation of the RMB within two years.

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