Centre for English Language Education Independent Research Project for Pre Masters Academic year 2011-2012, Semester Two Title: An evaluation of the impact of RMB appreciation on the Chinese agricultural trade Abstract As a major part of the Chinese economy, China’s agricultural trade has developed since the 1980s. After the Chinese currency start being appreciated by the domestic government in 2005, this tendency seemed to soar. Researches have shown both internal and external factors can account for the RMB appreciation and both negative and positive effects have been presented on China’s agricultural exports and imports.
Therefore, this project firstly discusses the different causes of RMB appreciation, followed by an evaluation of its impact on China’s agricultural trade which finally concludes the overall effects are beneficial. Content Page Abstract Introduction1 Literature Review2 1. The Causes of RMB appreciation4 1. 1 Intrinsic factors4 1. 2 Extrinsic factors5 2. The Impact on China’s agricultural trade6 2. 1 Adverse effects on exports6 2. 2 Beneficial effects on imports7 2. 3 Evaluation of the effects7 Conclusion9 Bibliography10 Introduction
In recent years, the appreciation of Renminbi (Chinese currency) has become a much-discussed topic in the world . The revolution of the Yuan can be traced back to July 21 in 2005, when Chinese government announced its domestic currency appreciated 2. 1% against the U. S dollar (Goldstein and Lardy, 2006, p. 1). Since then, the Chinese RMB has been in frequent fluctuation and appreciating gradually. This process can be treated as “a growth of the international purchasing power of domestic currency” (Zhang and Li, 2010, p. ) and be defined as “an increase in the value of a currency as measured by the amount of foreign currency it can buy” (Mankiw et al. , 2011, p. 712). Consequently, close attention has been paid to the impact of RMB appreciation, especially on agricultural trade, which has been a major part of the Chinese economy . The aim of this project is to evaluate how significant the impacts have been for different parts of the Chinese agricultural trade and overall, whether these has been positive or negative. As it has now seven years since China appreciated its currency against the U.
S dollar, data and analysis are now available, and the impact of RMB appreciation can be critically researched. It can be clearly seen that overall China’s agricultural trade has been developed significantly though some evidences show adverse effects on its export trade. This project will firstly review the literature related to the causes of RMB appreciation and its impact on China’s agricultural trade. It will then go on to the section 1, which will examine the different viewpoints about why RMB appreciated.
Section 2 will first evaluate the impact of RMB appreciation on imports and exports of the Chinese trade and then conclude most of this area has been positively affected. Literature Review Since China appreciating its currency in 2005, the domestic agricultural trade has varied significantly. Many experts have researched the causes of RMB appreciation and also considered the impact of it on the Chinese agricultural trade since that year. This part will review some of the literature about why RMB appreciated, and then compare the authors’ arguments about different effects on agricultural exports and imports esulting from the RMB appreciation. Many experts and researchers have analyzed the causes of RMB appreciation since it occurred (Yi, 2008, p. 7; Das, 2009, p. 8-9; Smith 2009, p. 12; Razmi et al. , 2012). The undervaluation of RMB exchange rate, which would cause stress to appreciate domestic currency, was the primary intrinsic factor (Das, 2009, p. 8-9; Nair and Sinnakkannu, 2010, p. 13). Moreover, some believed that the fast economic growth rate of China was the most fundamental internal reason due to its positive correlation with the currency appreciation (Razmi et al. , 2012).
From the external points of view, Smith (2009, p. 12) pointed out, the exchange rate of RMB could be affected by the trade unbalance between China and other countries. Government interventions like raising the domestic prices could also affect RMB appreciation in the long term (Zhang and Fung, 2006, p. 12). In addition, it was also suggested that China’s monetary reform is related to government policies, such as “the opening-up policies, establishment of a market-oriented economy system, promotion of energy conservation and environment protection”, of which lead to an added value of the Chinese currency (Yi, 2008, p. ). After appreciating the RMB, the Chinese agricultural trade had exhibited many changes. In terms of the impact on agricultural export trade, some concerned that it would be negatively affected (Kong and Li, 2006; Chen, 2009, p. 3-5; Ju and Yang, 2009, p. 1-9; Bonarriva, 2011, p. 140-142). Chen (2009, p. 3) feared that the competitive forces of the exports would be reduced as compared to the local farm products in foreign countries. Moreover, with the unbalanced competitive forces between the Chinese exports and the foreign local commodities, Bonarriva (2011, p. 5-63) worried about that the RMB appreciation would lead to a tremendous loss on the interests of domestic export enterprises due to the intense price war with the local agricultural commodities of targeted countries. The welfare of farmers, who still accounted for the majority of China’s population, would be sharply reduced that made them be less willing to plant the agricultural products (Kong and Li, 2006 cited in Chen, 2009, p. 3). In addition, Ju and Yang (2010, p. 2) maintained that the adverse effects on the Chinese agricultural exports ould persist because most of export enterprises in China were controlled by multinational corporations that China could not alter the price without authorization and the Chinese government was unable to intervene effectively. As for the impact on agricultural import trade in China, researches have shown the beneficial effects (Gale and Tuan, 2007, p. 12; Bonarriva, 2011, p. 45-49). Bonarriva (2011, p. 45) confirmed these positive effects could be clearly seen from the increasing import sales of agricultural foreign commodities which had greatly exceeded the domestic exports and reversed the agricultural trade surplus of China.
Furthermore, the appropriate RMB appreciation was indicated by Cheung et al. , (2006) that contributed to the development of the Chinese economy, which leaded to a growing demand for higher quality commodities. Therefore, Gale and Tuan (2007, p. 12) mentioned it would be more conductive to make the agricultural goods from overseas, especially developed countries, with the higher quality than the domestic commodities, enter into the Chinese market. This part has reviewed the literature on the various causes of RMB appreciation. Furthermore, different arguments about the impact on agricultural trade have been presented.
In the following sections, this project will discuss and evaluate the above in detail. 1. The Causes of RMB appreciation After the RMB began to appreciate gradually in 2005, researchers and experts have shown an increased interest in the causes of RMB appreciation, which there are both intrinsic and extrinsic factors that can account for the currency reform. This section mainly discusses these two different aspects. 1. 1 Intrinsic factors From internal points of view, there were mainly two factors related to the RMB appreciation. Firstly, Nouira et al. , (2011, p. ) held the point that the undervaluation of RMB exchange rate, which can be defined as “an observed exchange rate level below its equilibrium level”, was the primary intrinsic factor. Das (2009, p. 8-9) pointed out that it would cause stress to appreciate domestic currency if the RMB exchange rate was undervalued by other countries. Moreover, it was found by Nair and Sinnakkannu (2010, p. 13) the RMB started being undervalued in 2005, and since then, the total percentile value of the undervaluation against the USD and the EUR was approximately 21. 3%, 17. 4% respectively until the year of 2009 when the RMB had been appreciated around 17. %. Secondly, Razmi et al. , (2012) mentioned the stable economic growth rate of China also contributed to the RMB appreciation. Additionally, it was estimated by them that the currency appreciation was positive correlation with the changes on economic growth rate, which reflected the Chinese fast growing economy was the most fundamental internal factor that resulted in a gradual appreciation of RMB. 1. 2 Extrinsic factors On the other hand, some researchers maintained that the external factors became the most important reason for the RMB appreciation. As Smith (2009, p. 2) pointed out, the exchange rate of RMB could be affected by the trade unbalance between China and other countries. In addition, he also illustrated that the domestic government artificially lower the exchange rate of RMB against the USD in order to reduce China’s huge trade surplus with American. Furthermore, the reform of China’s monetary was related to government policies, such as “the opening-up policies, establishment of a market-oriented economy system, promotion of energy conservation and environment protection”, of which leaded to a value-added of the Chinese currency (Yi, 2008, p. ). Additionally, government interventions like raising the domestic prices could also affect RMB appreciation in the long term (Zhang and Fung, 2006, p. 12). In the following section, this project is going to show how the RMB appreciation affect China’s agricultural trade and evaluate the effects. 2. The Impact on China’s agricultural trade After China appreciated its currency, the overall Chinese agricultural trade has been positively affected.
This section will examine the different impact of RMB appreciation on China’s agricultural exports and imports, and then evaluate the effects. 2. 1 Adverse effects on exports Some researchers and experts feared that the appreciated value of RMB would swamp the Chinese agricultural exports that caused damage to domestic agriculture industry, and the most concern was the reduced competitive forces of the exports as compared to the local farm products in foreign countries (Bonarriva, 2011, p. 140-142; Chen, 2009, p. 3-5; Gale and Tuan, 2009, p. 19; Ju and Yang, 2009, p. -9). Gale and Tuan (2009, p. 19) pointed out that with a downtrend at the price of the foreign agricultural products, it would result in a less competitiveness of domestic exports. For example, the price of soybean in the U. S, conversed to RMB, has experienced a decrease from 2233 RMB per ton in 2003 to 1841 RMB per ton in 2009 due to the 17. 5% appreciation of RMB against USD, which was much lower than the soybean imported from China of which the price remained at 3017 RMB per ton during the year between 2003 to 2009 (Ju and Yang, 2009, p. 2).
Moreover, with the unbalanced competitive forces between the Chinese exports and the foreign local commodities, Bonarriva (2011) worried about China’s agricultural export enterprises had to cut the prices in order to win the intense price war with the local agricultural firms of targeted countries, which would lead to a tremendous loss on the interests of these domestic enterprises. The welfare of farmers, who still accounted for the majority of China’s population, would be sharply reduced that made them be less willing to plant the agricultural products (Kong and Li, 2006 cited in Chen, 2009, p. ). Additionally, Ju and Yang (2009, p. 2) concerned that the adverse effects of RMB appreciation on domestic exports would constantly persist because the majority of export enterprises were dominated by multinational corporations that China can not alter the price without authorization and the Chinese government was unable to intervene effectively. 2. 2 Beneficial effects on imports On the other hand, with the appreciated value of the Chinese currency, many studies have showed that China’s agricultural imports benefited (Bonarriva, 2011, p. 45-49; Gale and Tuan, 2007, p. 4; Chenug et al. , 2006). Firstly, according to Bonarriva (2011, p. 45-49), these positive effects could be clearly seen from the increasing import sales of agricultural foreign commodities, which gained from $25 billion in 2005 to $66. 4 billion in 2010 that has greatly exceeded the domestic exports and reversed the agricultural trade surplus of China. Secondly, the appropriate RMB appreciation was indicated by Chenug et al. , (2006) that contributed to the development of the Chinese economy, which leaded to a growing demand for higher quality commodities.
Therefore, as Gale and Tuan (2007, p. 13-14) mentioned, it would be more conductive to make the agricultural goods from overseas, especially developed countries, with the higher quality than the domestic commodities, enter into the Chinese market. For example, in China, although the average price of soybeans imported from American was a little more expensive than domestic beans, the willingness to pay for the American soybean with “higher oil content, uniform size and overall quality” was still unchanged (Gale and Tuan, 2007, p. 14). 2. 3 Evaluation of the effects
Although the negative effects on China’s agricultural exports mentioned above indeed came along with the RMB appreciation, the impact on the overall Chinese agricultural trade has been beneficial. To begin with, following the dramatical upward trend of import sales, Bonarriva (2011, p. 45-46) confirmed that China’s agricultural export sales had still climbed gradually with the increasing export price since 2005 because of the agricultural products’ low price elasticity of demand, which means “only a slight responsiveness of the quantity of a good or service demanded to changes in its price” (Mankiw et al, 2011, p. 8). Moreover, China’s export sales gradually went up from $19. 6 billion to $35. 7 billion during the year between 2005 to 2010, representing a 13% annual average increase (Bonarriva, 2011, p. 46). In addition, the slow pace of appreciation during the five years provided enough time to domestic exporters to defuse the negative effects. Wei, (2006) as cited in Chen (2009, p. 5) found it could minimize the negative effects on agricultural exports while maximize the positive effects on the overall trade by a most 5% appreciation per year.
Consequently, as Ju and Yang (2009, p. 3) pointed out, the annual average appreciation rate of RMB only fluctuated between 3%~4% within the reasonable range of currency value-added, which gave domestic export enterprises adequate time to transfer the risk of exchange rate volatility by the utilization of financial derivatives such as the hedging on the Agricultural Commodity Futures Market , which can be used as an effective mean to offset potential losses that may be occurred in the future (Wang and Ke, 2005, p. 4-15). As a result, with the appropriate value-added of Chinese currency, it has significantly presented a positive impact on the Chinese agricultural trade which make both exports and imports tend to be better developed and globally significant. Conclusion This project began by reviewing some literature related to the causes of RMB appreciation and how it affected the Chinese agricultural trade. It then discussed different intrinsic and extrinsic factors accounted for the Yuan revolution.
Some present studies showed that the undervaluation and stable economic growth rate were the primary two internal causes while others believed the unbalance trade, the government policies and intervenes could be the external reasons. Finally, it evaluated the impact of RMB appreciation on the Chinese agricultural trade. Two notable impacts on agricultural import trade were its doubled increased sales during 2005-09 and the growing demand for the imports with higher quality.
On the other hand, it was concerned that China’s agricultural exports would be negatively affected through the higher price of commodities imported from China than the local farm products of targeted countries and a huge loss on the interests of export enterprises and farmers. However, as RMB appreciated slowly, it gave the Chinese exporters enough time to take effective measures to avoid the risk of exchange rate and still increased the export sales gradually due to the farm products’ low price elasticity of demand.
Although the adverse effects really existed on the agricultural exports with the RMB appreciation, this project has argued that they were minimized based on the low appreciation rate of Chinese currency and negligible compared with the significant positive effects on China’s agricultural imports. In other words, the RMB appreciation has mainly benefited China’s agricultural trade. Words: 2416 Bibliography Bonarriva, J. 2011. China’s Agricultural Trade: Competitive Conditions and Effects on U. S. Exports. Washington D. C: USITC. Chen, L. 2009. Effect of RMB xchange rate movements on China’s agricultural export: A case study of export to Japan. China Agricultural Economic Review, 3, p. 15. Cheung, Y. W, Chinn, M. D. & Fujii, E. 2006. The Chinese economies in global context: The integration process and its determinants. Journal of the Japanese and International Economies, 20, p. 128-153. Das, D. K. 2009. The evolution of renminbi yuan and the protracted debate on its undervaluation: An integrated review. Journal of Asian Economics, 20, p. 570-579. Gale, F. & Tuan, F. 2007. China Currency Appreciation Could Boost U. S. Agricultural Exports. Washington D. C. Goldstein, M. amp; Lardy, N. 2006. China’s Exchange Rate Policy Dilemma. American Economic Review, 96, p. 422-426. Ju, R. & Yang, R. 2010. Risk of Exchange Rate Pass-through and Adaptive Strategies of Land-intensive Products in China: Taking Import Products from U. S. as an Example. Agriculture and Agricultural Science Procedia, 1, p. 170-178. Mankiw, N. G. , Quah, E. & Wilson, P. 2011. Principles of Economics. An Asian Edition. Singapo: Cengage Learning. Nair, M. K. V. & Sinnakkannu, J. 2010. De-pegging of the Chinese renminbi against the US dollar: analysis of its effects on China’s international trade competitiveness.
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