China has achieved an 8% GDPgrowth in 2009, and is further predicted to accomplish a 9.6% GDP growth in2010. Simultaneously, the countrys inflation rates are also shooting up. InFebruary, the consumer price index and producer price index experienced anincrease of 2.7%, and 5.4% respectively, which was higher than the previousmonth. Along with the economic growth, the RMB also seems to have a rapid escalation.
Impact of the Appreciation:
Effects of the appreciationhave been felt in both domestic, and abroad, becoming more and more significantwith the time. Increase in the RMB exchange rates will help to minimize importcosts of China, and help to reduce domestic inflationary pressure.Simultaneously, with the increase in RMB exchange rates, US will have to paymore cash while importing Chinese products. This will not be appreciated by US,especially for its domestic demand. The appreciation will have an impact on theChinese stock markets, and the profitability of the Taiwan owned companiesbased in China, especially the export oriented. Authorities prefer a two-waymovement in the RMB value, but that would be difficult due to the large amountof current account surplus, and high net capital inflows.
Does the appreciation favor China?
In a short term, the appreciationis likely to have less desirable effects on the countrys economic growth. Theexport market of China depends heavily on the availability of cheap labor.Escalating currency value will affect the exports of China, and resultantly, theoverall national economy. If the Yuan appreciates against the dollar, it wouldbring financial instability, and is anticipated to endanger Chinas financial security.
On the contrary, some industryanalysts predict that, in the long term RMB appreciation will result in athree-fold benefit for the country.
- It will generate more development opportunities. It will augment the status on the country in the global forefront, people will feel richer, and will influence the commodity structure and the flow of investment. It will also maneuver the structure of domestic production resources.
- The soaring currency value is likely to promote technical innovation, as the same relies on the market mechanism of the country, using price as a lever. Labor cost in China is cheap, while production and energy costs are expensive. The appreciation will encourage a demand for land and labor, and ultimately the demand for innovation. Export products depend more on technological innovation so as to remain competitive in the international market.
- Finally, it will benefit the people as well. It makes imported products cheaper. It will motivate the market price of domestic financial assets, changing the financial market structure. Chinese people will see their money growing.
The appreciation of Chinesecurrency will simultaneously put pressure on other Asian countries, forcingthem to increase their currencies as well. Taiwan currency is being predictedby industry experts to go up. A notable proportion of Asian exports to China are intermediate goods for re-export. This could keep the final export pricesunchanged if the RMB appreciation is offset by low import prices.
Economic analysts foresee afurther appreciation during the course of the current year and also during 2011. China should embrace new opportunities that have opened due to its currencyappreciation, and allow growth for its national economy.