Financial reform is considered one of the top priorities for China's overall economic reform, and currency reform plays a key role in liberalizing the financial sector.
The Chinese currency, the yuan, has been on an upward trend since November; and the currency rose to a new record high on December 10, 2013, strengthening 16 basis points to reach 6.1114 against the US dollar.
In fact, as of right now, the yuan has appreciated over 34 percent against the US dollar since July 2005 when China launched reforms on the yuan exchange rate mechanism.
How to see the yuan's substantial appreciation? Is the Chinese currency really a one-way bet upward?
Joining the Elite Talk program to talk about these sizzling hot topics is former US Undersecretary of Treasury Mr. Timothy Adams. While at the White House, he was the George W. Bush administration's point person on international financial and economic issues, including exchange rate policy issues. He has regularly interacted with top-ranking officials in key emerging markets including China and traveled extensively throughout the world's second-largest economy. Here's our talk.
Zhenyu Li: You know, the yuan convertibility and exchange rate reform are also important parts of China's broad financial sector reforms. As of right now, the Chinese currency, the RMB, has appreciated about 34 percent against the US dollar since the exchange rate reform eight years ago. So, what is your take on the yuan's appreciation?
Timothy Adams: The appreciation and the officials' efforts to allow that appreciation I think should be applauded. It was the right policy; it's the right trend and the right outcome. And it's probably pretty close to being at its equilibrium level, maybe a little bit still undervalued, but it's pretty close to its equilibrium. That's important for Chinese households. It increases their purchasing power for imports in a variety of goods and services, makes that cheaper, and therefore raises the living standards for households.
But I think it's part of the reform effort with respect to liberalizing interest rate, opening the capital account, letting the exchange rate reflect underlying flows of demand and supply, all those are important part of overall financial sector reform.
Zhenyu Li: So you don't think the Chinese currency is still much overvalued, right?
Timothy Adams: I've seen a variety of estimates that say the yuan is undervalued by 7 or 8 percent, but those models can differ. I am more interested in focusing on the broader trend, and the trend has been the right direction, it's been the right policy, and we should applaud the Chinese officials for allowing that to happen, and encourage further liberalization of the exchange rate.
Zhenyu Li: What's your prediction on the yuan's exchange rate against the US dollar in the medium term?
Timothy Adams: Well, I would expect that the exchange rate will continue to normalize and whatever adjustments need to occur in order to reach equilibrium will actually occur, so I would say that I would be fairly bullish on the exchange rate of the currency in the medium term.
But again, this is part of a broader panoply of changes that will occur as part of the financial sector reform.
Zhenyu Li: Talking about the China-US economic ties, the relationships seem to be strengthened after the fifth round of the China-US Strategic and Economic Dialogue and President Xi Jinping and President Barack Obama's California meeting.
Timothy Adams: Yes. I think the relations are good. There is less complaining in the US about a misaligned exchange rate than there has been in previous years. There is always going to be some debates or discussions about trade issues, but that happens with every one of our trading partners in the US. There are always some complaints between the US and some countries on a particular trade case, and that's just the normal part of an open and global and complex trading system. But I've seen the US-China economic relations are good and getting better.
(This is a reprint from the People's Daily Online of the December 20, 2013 edition.)