《中国金融市场 Chinese Financial Markets》补充阅读文献：renmibi controversies（morris goldstein-06-6）

RENMINBI CONTROVERSIES Morris goldstein No topic in intermational monetary economics has probably been more debated over the past three vears than what should be done about Chinas currency regime and about the exchange rate for the renminbi(RMB). In this article, I take up three questions that are at the center of the current debate, namely: (1)Is the RMB undervalued and, if so, by how much?(2) Would an RMB appreciation of 20-25 ercent be particularly harmful for Chinas economic growth and development, as well as for its domestic financial stability?(3)Was the July 21, 2005, currency reform a large or tiny step forward? Is the rMB Undervalued? Among the many approaches available for estimating equilibrium exchange rates, I prefer two: the"underlying balance"approach and the "global payments"approach. In both cases, I am going to assume that no wholesale change occurs in China's capital-account regime over say, the next three years Under the underlying balance approach, one asks what level of the real effective exchange rate-that is, the trade-weighted aver- age of nominal exchange rates adjusted for inflation differentials be ween the home country and its trading partners--would produce Cato Journal, Vol 26, No. 2(Spring/Summer 2006). Copyright Cato Institute. All Morris Goldstein is Dennis Weatherstone Senior Fellow at the Institute for International Economics. He thanks C. Fred Bergsten, Nick Lardy, Mike Mussa, and Ted Truman for helpful comments on an earlier draft, and Anna Wong for excellent research assistance. Another controwersial issue is whether China has been"manipulating" the value of the RMB counter to its obligations as a member of the International Monetary Fund. In Goldstein(2006a), I answer that question in the affirmative On April 14, 2006, the Chinese authorities announced a set of foreign exchange liberal- ization measures, including an easing of restrictions on portfolio capital outflows. Like Anderson(2006), I expect the initial impact of this liberalization on Chinas balance of payments to be quite small. The effect ower the next few years is likely to be moderate but not enough to invalidate the conclusion that China's overall balance of payments is apt to be still in substantial disequilibrium

RENMINBI CONTROVERSIES Morris Goldstein No topic in international monetary economics has probably been more debated over the past three years than what should be done about China’s currency regime and about the exchange rate for the renminbi (RMB). In this article, I take up three questions that are at the center of the current debate, namely: (1) Is the RMB undervalued and, if so, by how much? (2) Would an RMB appreciation of 20–25 percent be particularly harmful for China’s economic growth and development, as well as for its domestic financial stability? (3) Was the July 21, 2005, currency reform a large or tiny step forward?1 Is the RMB Undervalued? Among the many approaches available for estimating equilibrium exchange rates, I prefer two: the “underlying balance” approach and the “global payments” approach. In both cases, I am going to assume that no wholesale change occurs in China’s capital-account regime over say, the next three years.2 Under the underlying balance approach, one asks what level of the real effective exchange rate—that is, the trade-weighted aver￾age of nominal exchange rates adjusted for inflation differentials be￾tween the home country and its trading partners—would produce Cato Journal, Vol. 26, No. 2 (Spring/Summer 2006). Copyright © Cato Institute. All rights reserved. Morris Goldstein is Dennis Weatherstone Senior Fellow at the Institute for International Economics. He thanks C. Fred Bergsten, Nick Lardy, Mike Mussa, and Ted Truman for helpful comments on an earlier draft, and Anna Wong for excellent research assistance. 1 Another controversial issue is whether China has been “manipulating” the value of the RMB counter to its obligations as a member of the International Monetary Fund. In Goldstein (2006a), I answer that question in the affirmative. 2 On April 14, 2006, the Chinese authorities announced a set of foreign exchange liberal￾ization measures, including an easing of restrictions on portfolio capital outflows. Like Anderson (2006), I expect the initial impact of this liberalization on China’s balance of payments to be quite small. The effect over the next few years is likely to be moderate but not enough to invalidate the conclusion that China’s overall balance of payments is apt to be still in substantial disequilibrium. 251

CATO JOURNAL equilibrium in the home country's balance of payments, where equi librium means an"underlying "current account position that is ap- proximately equal (and opposite in sign)to"normal"net capital flows Suppose we take the average of Chinas capital account balance over the 1999-2002 period-a surplus equal to 1.5 percent of gross domestic product(GDP)as a rough estimate of its normal net capi tal flows. Chinas capital account surplus in 2003 and 2004 was much larger than that--on the order of 7-8 percent of gDP--but much of that appears to have been driven by speculative capital inflows, in- duced primarily by an expected appreciation of the RMB If normal net capital flows are in surplus by 1.5 percent of GDP, equilibrium then calls for an underlying current account deficit equal to 1.5 percent of GDP. The "underlying current account"can be defined as the actual current account balance adjusted for two factors cyclical movements in the economy that make the demand for im ports unusually high or low, and the lagged trade effects of earlier exchange rate changes that are not yet visible in the published sta- tistics.Chinas actual, overall current account surpluses in 2003 and 2004 were 3.3 and 4.2 percent of GDP, respectively. The underlying current account surplus was undoubtedly higher than the actual ones in those two years because the overheated state of the Chinese economy was pushing the demand for imports way up and because the real, trade-weighted value of the RMB depreciated during that period, suggesting positive trade-balance effects in the pipeline(see Goldstein 2004). Without pretending to undue precision, the under lying current account surplus in 2003-2004 was probably in the neighborhood of 4.5-5 percent of GDP. Chinas actual global current account surplus in 2005 was much larger still. Based on official figures just recently released, the actual current account surplus last year was 7.2 percent of GDP. The un- derlying surplus would be somewhat lower because domestic demand growth slowed in China last year--reducing the growth of imports- and because the RMB appreciated in real, trade-weighted terms in 2005.Nevertheless, the underlying current account surplus in 2005 was likely on the order of 5-6 percent of GDP Using the revised GDP series released in January 2006, the figure for normal net capital flows would be a surplus equal to 1.4 percent of GDP. According to J. P. Morgan's index of real effective exchange rates, the RMB appreciated t out 9 percent in 2005---reducing its cumulative depreciation since the dollar peak in bruary 2002 to about 2 percent. In contrast, Citigroup's index of real effective exchange rates has the RMB appreciating about 6 percent in 2005--leaving the cumulative depi ciation since February 2002 at a still substantial ll percent

equilibrium in the home country’s balance of payments, where equi￾librium means an “underlying” current account position that is ap￾proximately equal (and opposite in sign) to “normal” net capital flows. Suppose we take the average of China’s capital account balance over the 1999–2002 period—a surplus equal to 1.5 percent of gross domestic product (GDP)—as a rough estimate of its normal net capi￾tal flows.3 China’s capital account surplus in 2003 and 2004 was much larger than that—on the order of 7–8 percent of GDP—but much of that appears to have been driven by speculative capital inflows, in￾duced primarily by an expected appreciation of the RMB. If normal net capital flows are in surplus by 1.5 percent of GDP, equilibrium then calls for an underlying current account deficit equal to 1.5 percent of GDP. The “underlying current account” can be defined as the actual current account balance adjusted for two factors: cyclical movements in the economy that make the demand for im￾ports unusually high or low, and the lagged trade effects of earlier exchange rate changes that are not yet visible in the published sta￾tistics. China’s actual, overall current account surpluses in 2003 and 2004 were 3.3 and 4.2 percent of GDP, respectively. The underlying current account surplus was undoubtedly higher than the actual ones in those two years because the overheated state of the Chinese economy was pushing the demand for imports way up and because the real, trade-weighted value of the RMB depreciated during that period, suggesting positive trade-balance effects in the pipeline (see Goldstein 2004). Without pretending to undue precision, the under￾lying current account surplus in 2003–2004 was probably in the neighborhood of 4.5–5 percent of GDP. China’s actual global current account surplus in 2005 was much larger still. Based on official figures just recently released, the actual current account surplus last year was 7.2 percent of GDP. The un￾derlying surplus would be somewhat lower because domestic demand growth slowed in China last year—reducing the growth of imports— and because the RMB appreciated in real, trade-weighted terms in 2005.4 Nevertheless, the underlying current account surplus in 2005 was likely on the order of 5–6 percent of GDP. 3 Using the revised GDP series released in January 2006, the figure for normal net capital flows would be a surplus equal to 1.4 percent of GDP. 4 According to J. P. Morgan’s index of real effective exchange rates, the RMB appreciated about 9 percent in 2005—reducing its cumulative depreciation since the dollar peak in February 2002 to about 2 percent. In contrast, Citigroup’s index of real effective exchange rates has the RMB appreciating about 6 percent in 2005—leaving the cumulative depre￾ciation since February 2002 at a still substantial 11 percent. CATO JOURNAL 252

RENMINBI CONTROVERSIES a The foregoing implies that China's current account balance needs deteriorate by a whopping 6.5-7.5 percent of GDP to restore equilibrium to its overall balance of payments. If one does some simulations with a small trade model to calculate what size real ap- preciation of the RMB would generate such a large negative swing in Chinas current account--using a range of plausible price elasticities giving due consideration to how the high import content of Chinas exports affects its export prices, and making alternative assumptions about the second-round feedback effects of income changes on the demand for imports-the answers tend to congregate in the 20-35 percent range. Note again that this estimate of undervaluation of the RMB is not dependent either on the large speculative capital inflows of recent years or on China's large and rising bilateral trade surplus ith the United States A second complementary approach, the global payments approach asks what role RMB adjustment should play in the correction of large existing payments imbalances around the world--not just in China Here, the elephant in the room is the large U.S. current account deficit--running at about 6. 5 percent of GDP in 2005 and threaten ing to go higher over the medium term(see Cline 2005). An analysis of U.S. external debt dynamics suggests that a deficit only about half that size is likely to be sustainable. As argued by Mussa(2005 )and others, one key element in any effective strategy to correct the U.S external imbalance, while simultaneously sustaining healthy global economic growth, is a further depreciation in the real trade-weightee dollar from its current level- on the order of 15-25 percent Emerging Asia plus Japan account for about a 40 percent weight in the trade-weighted dollar index. Whereas the euro. the canadian dollar, and the Australian dollar, among other market-determined exchange rates, have shown strong(real effective) appreciations dur ing the first wave of dollar depreciation (since February 2002), the Asian currencies-with the notable exceptions of the Korean won and Indonesian rupiah--have either appreciated only slightly(e. g, Thai Even for a given set of elasticities, estimates of the degree of undervaluation change over time, reflecting changes in trade balances, exchange rates, the cyclical position of the economy. and other factors es that, in concert with a steady tightening of U.S. monetary conditions, would estic demand growth relative to output growth; and policy measures in Europe nd Japan that would increase the growth of domestic demand relative to the gro utput. According to J. P. Morgan's indexes of real, trade-weighted exchange rate dollar has fallen about 19 percent since the dollar peak in February 2002; Citigroup places the dollar depreciation since the February 2002 peak at a smaller 14 percent 253

The foregoing implies that China’s current account balance needs to deteriorate by a whopping 6.5–7.5 percent of GDP to restore equilibrium to its overall balance of payments. If one does some simulations with a small trade model to calculate what size real ap￾preciation of the RMB would generate such a large negative swing in China’s current account—using a range of plausible price elasticities, giving due consideration to how the high import content of China’s exports affects its export prices, and making alternative assumptions about the second-round feedback effects of income changes on the demand for imports—the answers tend to congregate in the 20–35 percent range.5 Note again that this estimate of undervaluation of the RMB is not dependent either on the large speculative capital inflows of recent years or on China’s large and rising bilateral trade surplus with the United States. A second complementary approach, the global payments approach, asks what role RMB adjustment should play in the correction of large existing payments imbalances around the world—not just in China. Here, the elephant in the room is the large U.S. current account deficit—running at about 6.5 percent of GDP in 2005 and threaten￾ing to go higher over the medium term (see Cline 2005). An analysis of U.S. external debt dynamics suggests that a deficit only about half that size is likely to be sustainable. As argued by Mussa (2005) and others, one key element in any effective strategy to correct the U.S. external imbalance, while simultaneously sustaining healthy global economic growth, is a further depreciation in the real trade-weighted dollar from its current level—on the order of 15–25 percent.6 Emerging Asia plus Japan account for about a 40 percent weight in the trade-weighted dollar index. Whereas the euro, the Canadian dollar, and the Australian dollar, among other market-determined exchange rates, have shown strong (real effective) appreciations dur￾ing the first wave of dollar depreciation (since February 2002), the Asian currencies—with the notable exceptions of the Korean won and Indonesian rupiah—have either appreciated only slightly (e.g., Thai 5 Even for a given set of elasticities, estimates of the degree of undervaluation change over time, reflecting changes in trade balances, exchange rates, the cyclical position of the economy, and other factors. 6 Other key elements include: a credible medium-term plan of fiscal consolidation in the United States that, in concert with a steady tightening of U.S. monetary conditions, would slow domestic demand growth relative to output growth; and policy measures in Europe and Japan that would increase the growth of domestic demand relative to the growth of output. According to J. P. Morgan’s indexes of real, trade-weighted exchange rates, the dollar has fallen about 19 percent since the dollar peak in February 2002; Citigroup’s index places the dollar depreciation since the February 2002 peak at a smaller 14 percent. RENMINBI CONTROVERSIES 253

CATO JOURNAL baht and the Indian rupee) or have actually depreciated. In some cases(the Malaysian ringgit, the Japanese yen, and the Taiwanese dollar), the depreciation has been large despite sizable current ac- count surpluses. If the Asian currencies do not lead the way in the needed second wave of dollar depreciation, either the resulting over all depreciation of the dollar will be too small, or the burden of appreciation will fall heavily on economies where a further large appreciation would not be warranted by their economic circum tances (see Goldstein 2005) Under the global payments approach, China is a prime candidate for significant real currency appreciation: it has experienced massive reserve accumulation equal to 10 percent of GDP over each of the past three years; its real, trade-weighted exchange rate has depreci ated over this period; and it has now recorded 10 successive quarters of 9 percent plus economic growth. Moreover, an appreciation of the RMB would likely induce some appreciation in some other Asian lIrrencles To sum up, the message I take away from these approaches to assessing the equilibrium value of the RMB is that it remains signifi cantly undervalued on a real, trade-weighted basis--on the order of 20-35 percent. A wholesale liberalization of controls on capital out flows could wipe out most of this undervaluation, but the fragile state of Chinas banking system makes this policy neither desirable nor likely for the next several years. True, there are other approaches to valuing the RMB (e.g, purchasing-power-parity calculations, struc tural models of the RMB, and VAR models), and there are other ad current accounts and normal capital flows. None of those approache. hoc adjustments one could make to obtain estimates of underly however, yields results persuasive enough and dif fferent enough to overturn the large undervaluation verdict. 10 TheJ. P. Morgan and Citigroup indexes of real effective exchange rates differ substantially from each other on the recent movements of the Singapore dollar and Philippine pe tRuman(2005) considers various scenarios for reducing the U.S.curr unt deficit to 3 percent of GDP, including one where Asian currencies lead the second wave of app ciation against the U.S. dollar. In that latter scenario, the RMB appreciates in real trade- weighted terms by 17 percent and by 41 percent against the dollar. ng an approach that focused on restoring medium-term equilibrium to the"basic balance"in Chinas balance of payments, Anderson(2005b) calculated that the RMB was undervalued (on a real effective basis) by about 25 percent. Cline(2005)finds that the RMB is undervalued by 21 percent on a real trade-weighted basis from its March 2005 level nd is undervalued by 46 percent in real terms against the U.S. dollar relative to a 2002 Many of these studies are reviewed in Cheung, Chinn, and Fujii(2005)

baht and the Indian rupee) or have actually depreciated.7 In some cases (the Malaysian ringgit, the Japanese yen, and the Taiwanese dollar), the depreciation has been large despite sizable current ac￾count surpluses. If the Asian currencies do not lead the way in the needed second wave of dollar depreciation, either the resulting over￾all depreciation of the dollar will be too small, or the burden of appreciation will fall heavily on economies where a further large appreciation would not be warranted by their economic circum￾stances (see Goldstein 2005).8 Under the global payments approach, China is a prime candidate for significant real currency appreciation: it has experienced massive reserve accumulation equal to 10 percent of GDP over each of the past three years; its real, trade-weighted exchange rate has depreci￾ated over this period; and it has now recorded 10 successive quarters of 9 percent plus economic growth. Moreover, an appreciation of the RMB would likely induce some appreciation in some other Asian currencies. To sum up, the message I take away from these approaches to assessing the equilibrium value of the RMB is that it remains signifi￾cantly undervalued on a real, trade-weighted basis—on the order of 20–35 percent.9 A wholesale liberalization of controls on capital out￾flows could wipe out most of this undervaluation, but the fragile state of China’s banking system makes this policy neither desirable nor likely for the next several years. True, there are other approaches to valuing the RMB (e.g., purchasing-power-parity calculations, struc￾tural models of the RMB, and VAR models), and there are other ad hoc adjustments one could make to obtain estimates of underlying current accounts and normal capital flows. None of those approaches, however, yields results persuasive enough and different enough to overturn the large undervaluation verdict.10 7 The J. P. Morgan and Citigroup indexes of real effective exchange rates differ substantially from each other on the recent movements of the Singapore dollar and Philippine peso. 8 Truman (2005) considers various scenarios for reducing the U.S. current account deficit to 3 percent of GDP, including one where Asian currencies lead the second wave of appre￾ciation against the U.S. dollar. In that latter scenario, the RMB appreciates in real trade￾weighted terms by 17 percent and by 41 percent against the dollar. 9 Using an approach that focused on restoring medium-term equilibrium to the “basic balance” in China’s balance of payments, Anderson (2005b) calculated that the RMB was undervalued (on a real effective basis) by about 25 percent. Cline (2005) finds that the RMB is undervalued by 21 percent on a real trade-weighted basis from its March 2005 level and is undervalued by 46 percent in real terms against the U.S. dollar relative to a 2002 base. 10Many of these studies are reviewed in Cheung, Chinn, and Fujii (2005). CATO JOURNAL 254

RENMINBI CONTROVERSIES Would an rmb revaluation be bad for China's Growth and Financial Stability? Many have argued that even if the RMB is undervalued, it would be most unwise to undertake a large revaluation since this could be catastrophic for Chinas growth and economic development, as well as its social and financial stability. In this context, some opponents of RMB revaluation emphasize the large-scale and continuing migration out of agriculture, the sizable employment losses in state-owned in dustries, and the large annual flow of graduates looking for work Taken together, these labor force trends are said to create irresistible social pressures for rapid economic growth that can only be accom- modated with the high export growth emanating from a highly under- valued exchange rate. Still others opposed to revaluation assert that the rigid link of the RMB to the dollar--along with its undervalua tion--has served as an essential pillar of China's domestic financial stability and as a way of encouraging large inflows of foreign direct investment that can compensate for the weaknesses of Chinas do- mestic banking system I find these arguments against a significant RMB revaluation un- persuasive. Getting the arguments right about the benefits and costs of an RMB revaluation is important because China cannot be ex- pected to undertake an exchange rate policy that is perceived to be counter to its self-interest. Let me offer three observations First, it is an exaggeration both to equate any significant real ap- reciation of the RMB with very slow growth and to regard exports as the main driver of Chinas growth Between 1994 and early 2002 the real trade-weighted exchange rate of the RMB appreciated by almost 30 percent(see Figure 1),yet the Chinese economy grew at an average annual rate of 9 percent and growth never dipped below 7 percent growth in any single year(see Figure 2). True, this large real appreciation of the RMB did not come all at once, but there were individual years in which the appreciation was 8 percent or more(13 percent in 1997 and 8 percent in 2000) Also, the record over this eight-year period demonstrates that the Chinese economy is capable of growing at a robust pace when the real exchange rate is following strong trend appreciation The export-to-GDP ratio in China is now approaching 35 per- nt. but as Anderson(2005a) has recently argued, this does not Note also from Figure 2 that the strong trend appreciation of the RMB really took pla over the first four years of this period

Would an RMB Revaluation Be Bad for China’s Growth and Financial Stability? Many have argued that even if the RMB is undervalued, it would be most unwise to undertake a large revaluation since this could be catastrophic for China’s growth and economic development, as well as its social and financial stability. In this context, some opponents of RMB revaluation emphasize the large-scale and continuing migration out of agriculture, the sizable employment losses in state-owned in￾dustries, and the large annual flow of graduates looking for work. Taken together, these labor force trends are said to create irresistible social pressures for rapid economic growth that can only be accom￾modated with the high export growth emanating from a highly under￾valued exchange rate. Still others opposed to revaluation assert that the rigid link of the RMB to the dollar—along with its undervalua￾tion—has served as an essential pillar of China’s domestic financial stability and as a way of encouraging large inflows of foreign direct investment that can compensate for the weaknesses of China’s do￾mestic banking system. I find these arguments against a significant RMB revaluation un￾persuasive. Getting the arguments right about the benefits and costs of an RMB revaluation is important because China cannot be ex￾pected to undertake an exchange rate policy that is perceived to be counter to its self-interest. Let me offer three observations. First, it is an exaggeration both to equate any significant real ap￾preciation of the RMB with very slow growth and to regard exports as the main driver of China’s growth. Between 1994 and early 2002 the real, trade-weighted exchange rate of the RMB appreciated by almost 30 percent (see Figure 1), yet the Chinese economy grew at an average annual rate of 9 percent and growth never dipped below 7 percent growth in any single year (see Figure 2). True, this large real appreciation of the RMB did not come all at once, but there were individual years in which the appreciation was 8 percent or more (13 percent in 1997 and 8 percent in 2000).11 Also, the record over this eight-year period demonstrates that the Chinese economy is capable of growing at a robust pace when the real exchange rate is following strong trend appreciation. The export-to-GDP ratio in China is now approaching 35 per￾cent. But as Anderson (2005a) has recently argued, this does not 11Note also from Figure 2 that the strong trend appreciation of the RMB really took place over the first four years of this period. RENMINBI CONTROVERSIES 255