Chapter 11. Range and Path of the RMB Appreciation 349
11.1 Path Choice for the RMB Appreciation
China has maintained a high trade surplus in recent years, attracting a large amount of foreign direct investment. At the same time, a considerable amount of idle funds flow into China. Without a doubt, as long as large amounts of capital continue to flow into China, the pressure of the RMB appreciation is not likely to disappear. Based on the exchange rate change trend since 2005, the RMB will continue appreciating.
Both theory and practice have proved that an exchange rate adjustment is not to be feared. The RMB has appreciated by over 30% since 2005, but China’s economy, as well as its exports and employment, continues to grow rapidly.
Exchange rate adjustment can happen in two ways: Radical adjustment and gradual adjustment. The former involves cutting the knot at once, whereas the latter entails small steps and changing the adjustment range according to the internal and external environ- ments.
People advocating radical adjustment of the exchange rate think that the one-off significant adjustment prevents financial speculation and reduces the pressure of inflation. Although this statement makes sense, the right range still needs to be determined. Some people sug- gest adjusting the RMB exchange rate to the equilibrium only once, but such move brings two problems. First, how to calculate an equi- librium RMB exchange rate is a dilemma. Its starting point can be the foreign exchange market equilibrium, the equilibrium between
Range and Path of the RMB Appreciation 351
import and export, the interest equilibrium in all sides involved in trade, and so on. Different starting points can lead to different equilibrium exchange rates. If the equilibrium exchange rate is not unique, how can the one-off exchange rate adjustment be imple- mented?1 Second, although an “equilibrium exchange rate” exists, it must change with the system dynamics. When the current exchange rate is adjusted to this level, the equilibrium exchange rate changes again. Setting an ever-changing equilibrium rate as an adjustment goal is similar to a cat that keeps trying, and failing, to catch its own tail.
As the so-called reasonable equilibrium exchange rate cannot be determined, no one-off appreciation adjustment scheme exists. In theory and practice, the exchange rate adjustment is considered a continuous and gradual process. Similar to the law of development of everything in the world, the exchange rate adjustment also happens in different degrees. Having no adjustment and excessive adjustment are both unsuitable. The impact of appreciation is determined by the appreciation range. Therefore, the impacts of the RMB appreci- ation on employment, import, export, and GDP should be explored through the CGE model, and the best appreciation strategy should be identified among several feasible schemes.
11.2. Dynamic Simulation of the Effect of Different Exchange Rate Appreciation Ranges on China’s Labor Market
Many people think that the RMB appreciation increases exports, decreases exports, and reduces job opportunities. Such highly abstract and partial view does not conform to the events that have occurred in recent years. The RMB has appreciated since 2005, but China’s new jobs have not decreased. In 2011, the new jobs in cities and towns of China reached 12.21 million, creating a new high in the past five years.2 As the effects of the RMB appreciation on different
1See Chapter 5 of this book for a discussion on the equilibrium exchange rate.
2Source:People’s Daily, Feb. 23, 2012.
352 From Trade Surplus to the Dispute over the Exchange Rate
sectors and industries are completely different, data should be decom- posed and specific analysis should be conducted when discussing the effect of the RMB appreciation on employment.
After RMB appreciation, the value of residents’ assets and domes- tic consumption generally increase, leading to an increase in job opportunities in the service industry. The imported spare parts and raw materials for processing trade sectors become cheaper, thus expanding profits for enterprises engaged in processing trade and improving their overseas competitiveness. Consequently, these enterprises receive more orders and provide more employment opportunities. By contrast, the general trade situation is complex.
High-tech enterprises in general trade are less affected, but the gen- eral labor-intensive enterprises suffer the negative effect. Whether the job opportunities of these enterprises are seriously affected depends on whether these enterprises have more obvious comparative advan- tages than overseas enterprises of the same kind. If their unit labor cost is lower than that of overseas competitors and if they maintain their competitive advantage after the RMB appreciation, then they will gain more profits and provide more jobs. However, if their unit labor cost is higher than that of their overseas competitors after the RMB appreciation, then they will lose some orders and provide fewer jobs. RMB appreciation generally has a negative effect on the employment of labor-intensive industries.
Whether to increase employment depends on the range of the RMB appreciation. If the appreciation is controlled within a certain range, then the increase in job opportunities in the service industry and the processing trade sector will exceed the decrease in job oppor- tunities in labor-intensive industries. Thus, instead of deteriorating, overall employment improves, which explains the phenomenon of China’s job market not deteriorating with the RMB appreciation.
The RMB appreciation is conducive to industrial upgrading, with part of the labor force in labor-intensive industries transferred to high-tech, processing trade (mostly belonging to the high-tech indus- tries) and service industries.
The RMB appreciation can either have positive or negative effects on the employment of different industries and sectors. Therefore,
Range and Path of the RMB Appreciation 353
RMB Appreciation
Create jobs
Technology intensive Manufacturing Service
Negative effect on job market Labor intensive
Less effect on job market
General Trade Processing Trade
Create Jobs
Figure 11.1: Effect of the RMB appreciation on the employment of different industries and sectors.
special attention should be paid to the range of RMB appreciation when studying the relationship between exchange rate adjustment and employment. Changes in both macroscopic employment and the employment of specific industries should be considered. As long as the gains from industrial upgrading exceed the losses in the labor- intensive departments, the price that the latter pays is worthwhile.
However, with a huge appreciation of the RMB, the job opportunities created in the short term by industrial upgrading cannot compensate for those lost by the labor-intensive industries. As the unemployment rate for that period increases, some people’s living standards decrease and the burden on the social security system increases. Without the corresponding safeguard measures, social stability is likely to be harmed. Therefore, individuals should deliberate on new policies and exercise caution in introducing these policies (Fig. 11.1).
354 From Trade Surplus to the Dispute over the Exchange Rate
This chapter establishes a dynamic CGE model for the quantita- tive simulation of the effect of the RMB appreciation on the labor market. The quantitative model cannot anticipate everything, but it can reveal the worst possible scenario. In other words, as long as the government is capable of dealing with the worst situation in the sim- ulation, it can adopt measures to protect the unemployed and help them find jobs within a reasonable period in case of high unemploy- ment. Therefore, such reform plan is feasible. If the simulation results in a scheme or a wide range of RMB appreciation that causes a dras- tic increase in unemployment beyond the capacity of society, then a slower pace and dividing the reform into several steps are recom- mended. Furthermore, China is a large country with an imbalanced economic development and different industrial structures in different regions. The effect of the RMB appreciation on some regions may be greater than that on others. Some regions can benefit from the RMB appreciation, whereas others can suffer from the negative effect.
Therefore, specific regions should be considered when simulating the exchange rate reform schemes to avoid the excessive concentration of the negative effect of the RMB appreciation, which leads to high unemployment in some regions in the short term. Regions where labor-intensive industries are highly centralized can prepare for and promote industrial upgrading in advance. “Vacating the cage for new birds,” which has been promoted by Guangdong Province in recent years, is an example of such positive measure.
This chapter uses the dynamic CGE model in stimulating the effect of the RMB appreciation on the employment of different sec- tors. The simulation period is from 2012 to 2020. We refer to the macro predicted data of the WEO 2011 ed., IMF, in setting the corresponding exogenous variables and the economic growth rate;
the population growth rate (assumed as the change rate of the labor supply) and investment rate are selected for the exogenous setting.
The baseline results are obtained after adjustment and simulation.
The policy line includes two situations, that is, the appreciation of the real RMB exchange rate by 5% and 10%.
We do not elaborate on the results of simulating the effect of the RMB appreciation on employment in different industries and regions
Range and Path of the RMB Appreciation 355
Table 11.1: Effect of the real RMB exchange rate appreciation on new jobs (10,000 persons).
Exchange rate unchanged
Annual real appreciation by 5%
Annual real appreciation by 10%
2008 1113 1113 1113
2009 1102 1102 1102
2010 1168 1168 1168
2011 1221 1221 1221
2012 1251 1253 1190
2013 1282 1285 1155
2014 1309 1315 1125
2015 1336 1344 1114
2016 1363 1374 1104
2017 1390 1404 1093
2018 1418 1434 1083
2019 1446 1467 1035
2020 1477 1501 954
Source: CGE simulation results.
because of space limitation. Table 11.1 lists the effect of the real RMB exchange rate appreciation on new jobs.
The simulation results show that an RMB appreciation by about 5% has no significant effect on China’s demand for labor. Overall, instead of a reduction, a slight increase in new jobs occurs, which is conducive to the expansion of China’s job market. The slight RMB appreciation (about 5%) increases the demand for laborers with professional skills to a certain extent and helps promote indus- trial adjustment and structural upgrading. By contrast, an annual appreciation of the real RMB exchange rate by 10% has serious con- sequences on China’s labor market expectations and leads to the reduction of new jobs (Fig. 11.2).