It is never easy to find out the truth, including the proper value of RMB. During the last 6 months, most currencies of emerging economies have appreciated against USD except RMB. Such a fact has aroused international pressure from China’s trading partners pushing China government to reconsider the pegging policy of RMB to USD (See Article from Chinatells). As a matter of fact, some currency (eg., Brz real) has appreciated more than 30% against USD. With RMB de-facto pegged to USD, in fact RMB has been depreciated against these currencies as well, giving China an added advantage for its export in the interantational trade competition. Therefore, to make the game ‘fair’, value of RMB shall be appreciated to the similar level as other EM currencies.
The argument goes without any problem so far. However, if we expand the time span a little bit, from Mar-Oct 09 to Aug08-Oct09 (starting from when the financial crisis unfolded), we see a totally different picture. Surprisingly, RMB is the strongest currency during that period (FX unchanged), while most other EM currencies have depreciated against USD more or less. An obvious conclusion from such comparison is that RMB is not over or under valued against any other currency, it is the de facto most stable currency among all. The recent appreciation of other currencies, such as Brz Real or Korean Won, is just an adjustment to their depreciation during an earlier period. From that perspective, the so called ‘free flotation’ only adds volatility to the other currencies, while not giving any benefit in terms of stablizing trade or keeping a proper value. Following this logic, there is a good point from China’s government to fix the RMB rate to USD, period.