¡¡¡¡From July 21, 2005, when China¡¯s currency exchange rate reform started, to Mid-December 2007, the RMB¡¯s value increased 13.3% against the USD, 14.2% against the Japanese Yen, 13.6% against the HKD, and yet dropped 6.6% against the Euro. If calculated by weighted average, the weighted value of RMB exchange rate was up by about 6.5%, averaging less than 3% per year.
¡¡¡¡The actual fluctuation of the exchange rate is to a certain extent related to import and export trade, with the ratio at roughly 1:0.5-0.8. That is, for each 10% increase in RMB value, exports dropped by 5-8% and imports grew by 5-8%.

¡¡¡¡Minimal initial increase in value

¡¡¡¡At the end of 2007, China¡¯s foreign trade seemed not to have fluctuated due to a small increase in the value of RMB. Quarterly imports and exports went on to grow steadily. Among the major trade partners, except for trade with Japan, which failed to rise significantly, trade with the EU, U.S. and HK etc all surged. When other factors are excluded, the effect of RMB appreciation?was quite minimal in this area.

¡¡¡¡Adjustment of import/export structure

¡¡¡¡First, it is helpful to maintain a balance between imports and exports. China¡¯s export trade has been growing at a fast pace for a long time, which, while stimulating the growth of the national economy, had also caused an internal and external imbalance, and led to frequent trade frictions with our major partners. But the pattern of the last two years shows that export growth in China has finally slowed a bit, imports are picking up speed, and both are moving toward a better balance yet with no serious impact on the growth of national economy.
¡¡¡¡Secondly, appreciation helps to optimise China¡¯s foreign trade commodity structure. RMB appreciation is equivalent to raising the price of some vital export factors, and restrains the export of such products as require invariably the big input of resources, low-cost competition and low additional value. Meanwhile, it is also equal to lowering the price of some vital import factors, which promotes to a certain extent greater consumption of resources from abroad as well as the import of advanced equipment and technology.
¡¡¡¡Thirdly, RMB appreciation assists in upgrading the processing industry and encouraging its relocation from the coastal areas of Eastern China, especially the Pearl river and Yangtze delta areas where it has become quite developed and has reached even to full saturation in certain places. This has highlighted the necessity to improve its class quality and the rate of value added. Similarly, in Mid-western China where things are often still relatively backward, the changing situation helps to beef up the local economy.
¡¡¡¡Fourth, the imbalance of trade with the U.S. and Europe will remain. Because of the rigidity of demand and structural complementation, China¡¯s favourable trade balance with the U.S. and Europe and unfavourable trade balance with Japan and South Korea will go on to grow although at a lower pace, even if the value of RMB is up by more than 5% against the USD, Euro and Yen. And that will contribute to the settlement of trade disputes and frictions between China and its major trade partners.

¡¡¡¡Weakens the influence of foreign trade on GDP

¡¡¡¡If, under various kinds of pressure and the action of market factors, the annual increase in RMB value exceeds more than 10% against the USD and the value of weighted exchange rate in foreign trade is up above 6% in 2008 and after, it will have a serious influence on China¡¯s import and export trade, making imports more competitive than exports of low value as well as low additional value. It can thus be inferred that imports in 2008 will possibly be up 5-8% from 2006 and 2007, while exports may drop by 5-8%. That is sure to weaken the influence of foreign trade on the growth of GDP, though being still within the range of acceptance. However, if the situation becomes worse, for instance, if the deterioration of U.S. economy leads to a general slow-down of the world economy, domestic prices rise to unexpectedly high levels, and adjustment of interest rate and macro control are further strengthened, then China¡¯s imports will still grow higher and exports drop lower.

¡¡¡¡Active action against risks

¡¡¡¡The value of the RMB has been increasing at a faster pace since the fourth quarter of 2007, up by 2.8% against the USD, which experienced accelerated devaluation in the first two months of this year; and the percentage is still expected to reach more than 10% for the whole year and to total above 25% for the last two years. Apart from the exchange rate, other factors that may produce a palpable effect on the Chinese economy in 2008 also include the following. (1) The deterioration of the U.S. economy, as has become more and more obvious, may cause a general slow-down of global economy. (2) Soaring prices at home have led to stronger fear of inflation and a rapid spiralling-up of export costs. (3) The influence of policy adjustment conducted in the last two years to check export growth is being increasingly felt. (4) Tight financial control has left a shortage of available funds for companies. All these factors play a part in the uncertainty of long-term and stable import and export growth for China.
¡¡¡¡Under such circumstances, a careful attitude should be taken toward the pressure on RMB appreciation that comes from various aspects, and to keep the adjustment of RMB exchange rate under a step-by-step active control (in prevention of rapid increases or any excessive increase at a single time). Meanwhile, monitoring the export of important commodities should be strengthened, and policies adopted in the last two years further improved or revised to encourage the change, transformation and upgrading of export-oriented processing businesses in coastal areas.
¡¡¡¡Companies that are engaged in import and export operations should on the other hand learn to use various risk-avoiding financial means to reduce possible losses that may be inflicted due to the fluctuations of exchange rate, and should therefore add appropriate clauses to contracts signed, and should adjust business tactics to further sharpen their competitive abilities.