2010-05-23

Perfect time for RMB to depreciate

Perfect Time for RMB/USD Rearrangement: Devaluation
Three misunderstandings need to be clarified.

The first is that the RMB exchange rate has been stable since July 2008. In fact, the RMB/euro exchange rate has changed dramatically since July 2008 due to the USD volatility against the euro.

Second is that "RMB appreciation" means "RMB appreciation against USD." The fact is that since the end of 2009, the RMB/USD rate has remained stable because of the sharp rise in the dollar index, while RMB against a basket of currencies has appreciated substantially. The euro, for example, is currently at 1/8.3 yuan, the highest level for the past eight years.

Third is that keeping the RMB exchange rate at a reasonable and balanced level means to maintain the stability of the RMB/ USD rate. What it really means is to maintain the stability of RMB against the basket of currencies, and the basic stability of an effective exchange rate.

After we clarify such misunderstandings, we must redefine the objectives of RMB reform, i.e. to promote the formation of a mechanism for a more market-oriented RMB exchange rate. The conception that RMB/USD appreciation is the same as RMB exchange rate formation mechanism reform is wrong and misleading.

Against the strong rise of dollar index, and following a basket of currencies mechanism, RMB may have to depreciate against the US dollar to ease its appreciation against other currencies.

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