The RMB Exchange Rate: Interest Groups in China’s Economic Policy Making
|书 名：||The RMB Exchange Rate: Interest Groups in China’s Economic Policy Making||成果形式：|
China Security, Issue 19, pp. 23-36 2011 World Security Institute China Security · Issue 19 23 He Xingqiang As China has gradually opened to the world, its foreign policy has become increasingly broad and complex. Today China’s foreign relations are not merely the Foreign Ministry’s affairs, and many other departments seek to protect their self-interests and also participate in policy formulation. Since reform and opening, international economic expansion has given rise to Chinese interest groups whose preferences are sometimes contrary to national trade and resource policies. Government ministries often echo these interests, at times even to the extent that local considerations supersede national interests. Some provincial governments have also become representatives for local interests and express themselves in different voices from the central government. The harmonizing of these disparate viewpoints has become the crucible for changes in Chinese policy. The internal struggle over RMB exchange rate reform has been exemplary of these circumstances, bearing out the considerations and policies preferences of various interest groups and governmental departments. He Xingqiang is an associate researcher at the Chinese Academy of Social Sciences’ Institute of American Stutdies. The RMB Exchange Rate Interest Groups in China’s Economic Policymaking 24 Interest Groups in China’s Economic Policymaking China Security · Issue 19 Since 2003, China’s trade surplus with the United States has grown rapidly. US manufacturers and trade unions have in turn pressured their government to intervene, blaming the RMB for the American trade deficit and manufacturing job losses. At the same time, China’s government has been faced with mitigating foreign trade imbalances, expanding internal demand, promoting the international competiveness of Chinese enterprises and raising the level of public openness. A combination of these factors lead to the rise of a consensus view in the central government that exchange rate reform was necessary. Thus, on July 21, 2005, China announced it was implementing a managed floating exchange rate system, that would use market supply and demand, as well as a reference to an adjustable basket of currencies for the RMB. The RMB was from then on set on a course of step-by-step appreciation.1 Since 2008 however, the reforms have stalled and debate has arisen over RMB appreciation’s negative effects on China’s economy, particularly its export industry. In this fight, various departments, organizations and interest groups have increased their lobbying efforts. A Chess match over RMB Appreciation: PBOC vs. MOFCOM The People’s Bank of China The most outspoken champion of RMB appreciation, the People’s Bank of China (PBOC), the nation’s central bank, has little policymaking power. The PBOC publishes an annual report on the implementation of currency policy but not on the broader issue of policy formulation. As a member of the State Council, China’s cabinet, the PBOC’s independence is not great. As an executive government department and a national financial policy advisory organization, it submits policy proposals to the State Council. Though its Monetary Policy Committee is the official organ for mapping out and discussing monetary policy, the true organization behind currency policy is the State Council’s Finance and Economics Leading Working Group. The PBOC, however, is on the front lines of implementing monetary policy and is particularly sensitive to the pressures of maintaining an undervalued currency. Since 2002, China’s growing current and capital account surpluses have placed the RMB under tremendous pressure to appreciate. In order to maintain the RMB exchange rate, the central bank must continually buy large quantities of US Treasuries and other dollar assets as well as intervene in foreign exchange markets. Each day the PBOC buys up excess foreign currency, primarily dollars, on the Shanghai Foreign currency exchange and then credits the reserves of China’s banks with a roughly equivalent amount of RMB. In this way, the central bank passively issues large amounts of RMB currency. Continuous increases in foreign exchange reserves have lead to a corresponding increase in domestic liquidity. Without government intervention, this monetary expansion would lead to rampant inflation. To combat inflationary pressure, the PBOC “sterilizes” currency by soaking up excess RMB in the marketplace, requiring banks to buy RMB-denominated central bank notes and hold a high percentage of their assets in reserve. Currency 25 He Xingqiang China Security · Issue 19 sterilization is costly, however, as the central bank tends to have to progressively issue more and more bills to mop up excess money in the economy, and this places upward pressure on the yields that it offers. That is, the greater the supply of sterilization paper, the more the central bank has to pay in interest costs to ensure that commercial banks continue to accept it. In theory, these costs make it hard to sustain sterilization. Nonetheless, since China’s interest rates are in the control of the government, the expanded scale of central bank notes did not lead to rising interest rates. So long as the central bank pays less interest on its sterilization paper than it earns on the corresponding foreign exchange investment, it can continue its sterilization operations indefinitely.2 The cost of this kind of manipulation, however, is that commercial banks are forced to continually buy low-profit central bank notes. This inevitably results in long-term productivity declines, bringing negative effects to the entire financial system. Even if excluding the impact of sterilization on banks, excessive foreign exchange reserves lead to future losses in national welfare. The simple solution to these problems is RMB appreciation, which would bring: a fundamental equilibrium to China’s international balance of payments; the end of large-scale interference in foreign currency markets; a leveling off of liquidity; and a decline in the need for sterilization. With balanced international payments, under normal banking system operation, the whole economic situation would be better. This realization has caused the central bank to speak out in favor of RMB appreciation. Its policy has been to promote the reform of the exchange rate mechanism, ultimately leading to an RMB marketization that will allow the currency to float freely. As for the negative repercussions of a stronger RMB on Chinese exports and manufacturing, the central bank believes the impacts will be limited, arguing that China’s exports have already proved this point since exchange rate reform in 2005. Second, excessive surplus is not in the interest of China’s balanced economic development. A stronger RMB would force businesses to increase production efficiency, accelerate industrial upgrades, and promote the transformation of China’s pattern of economic of growth. Furthermore, given the Chinese economy’s tendency to overheat in recent years, the normal appreciation of the currency is beneficial to macro-economic regulation. With the recent state of China’s financial affairs, it is apparent that there are ample financial resources to solve the temporary pain brought by appreciation.3 MOFCOM, a Loose Opposition Group The PBOC’s promotion of RMB exchange rate mechanism reform has been met with strong opposition. The most public face of this opposition has been MOFCOM, which is responsible for trade policy and export businesses, particularly labor-intensive exporting enterprises. They have been joined by the majority of the local govThe central bank believes the negative repercussions of RMB appreciation will be limited. 26 Interest Groups in China’s Economic Policymaking China Security · Issue 19 ernments in export-intensive coastal manufacturing areas. MOFCOM believes RMB appreciation will have very negative effects on China’s export and manufacturing industries, leading to the bankruptcy of many exporting enterprises, and affecting China’s economic growth and social stability. Although MOFCOM is a department of the State Council, it cannot be called an interest group. The interest groups instead are comprised of China’s exporting enterprises, which have already formed an immense aggregate interest group. When their interests are threatened by RMB appreciation, they exert pressure on the government departments in charge. Given MOFCOM’s role as the controlling body for trade policy and the centrality of exports in China’s economic growth, it naturally tends to gravitate toward the interests of exporters,4 and has become a spokesperson for these enterprises. The context of several MOFCOM officials’ speeches have made it clear that the Ministry and exporting enterprises have a similar understanding of the relationship between currency appreciation and exports. For instance, multiple previous MOFCOM vice ministers’ as well as MOFCOM’s spokesperson, Yao Jian’s, have spoken about keeping RMB exchange rate stability.5 They argue that RMB appreciation slows China’s export growth: the two years of export reform from 2007-2008 had export growth of 25.7 percent and 21.9 percent, compared with 34.6 and 35.4 percent growth in exports in the pre-reform 2003-2004 period.6 Opening Moves Under the leadership of Zhou Xiaochuan the PBOC began pushing for exchange rate mechanism reform in 2003. In September 2004, Yu Yongding, the director of the Chinese Academy of Social Science’s Institute of World Economics and Politics, began as the new financial expert for the Monetary Policy Committee. His viewpoint favored gradual appreciation,7 and he stated that as long as expansionary monetary policy was not adopted, appreciation would not lead into a trap of long-term economic depression as it did in the case of Japan.8 After discussion in banking and financial circles, Yu Yongding’s formulation of gradual style of modest appreciation was adopted in July 2005. In the face of opposition from MOFCOM and export business circles, the central bank was tasked with carrying out difficult coordination and negotiations to reach a consensus within the government.9 This included extensive discussion and research ranging from policy departments to academic research institutes. The biggest worry was that RMB appreciation could bring harm to exports and perhaps the entire economy. This viewpoint gained significant traction during the debate. Critics warned that if the RMB appreciated 3 percent, a good deal of China’s export enterprises—particularly textiles and light industry—would face mass closures, bankruptcy and unemployment. Because many affected businesses employed large As the controlling body for trade policy, MOFCOM tends to gravitate toward the interests of exporters. 27 He Xingqiang China Security · Issue 19 numbers of migrant laborers, opponents of RMB appreciation also warned that this might also lead to social instability.10 The degree, intensity and extent of the opposition was hard to gauge. The only public opposition against exchange reform came from economists and academics. How much their viewpoints were swayed by behind the scenes influence from the export enterprises is impossible to know. In spite of the opposition, the PBOC viewpoint won the day in the end. Exchange rate mechanism reform obtained the central government’s support and the voices of criticism died down. Domestic public opinion and mainstream media, on the whole, supported RMB appreciation, thinking the benefits of exchange rate reform outweighed its drawbacks. At the same time, the central government, in consideration of a few industries that would perhaps suffer losses, set forth a compromise proposal of three principles to guide exchange rate reform: domestic initiative, control and gradualism. From July 2005 to July 2008, accompanying the RMB’s approximate 21 percent appreciation against the US dollar, trade for the three-year period grew quickly. In 2006 to 2008, Chinese exports grew by 23.4 percent per annum and imports grew by an average of about 19.7 percent per year. There was no enormous decline in exports as opponents had feared. While the voices opposing appreciation were temporarily silenced, they had not disappeared. Opponents believed that the export growth in those two years had nevertheless declined from the years before 2005, and effects brought by the RMB’s appreciation were to blame. Exchange Rate Reform Stagnates From 2005 onward, China’s internal battles over RMB exchange rate reform continued behind closed doors. In 2008, under the influence of the global financial crisis, China’s economic development faced new challenges to balanced economic growth and, most importantly, to continued social stability. Exchange rate reform and the goal of ensuring continued stable economic growth were more closely linked. As a result, opposition factions swiftly gained the high ground in the discussion. Following exchange rate reform in 2005, the Chinese government tried to reduce the trade surplus by coercing export industries out of low-cost, market-saturated product lines, encouraging them instead to pursue upgraded products with higher profit margins. To wean enterprises away from low-value production, the government cut export tax rebates several times from 2006 on. At first, the effects of this change were unclear, but coinciding with the economic slowdown in the United States beginning in late 2007, RMB appreciation raised manufacturers’ costs. Meanwhile, with government restrictions on lending, new labor contract law and greater labor costs, many companies saw a sharp decline in profits within a few months. Textiles, clothing, toys, footwear and other labor-intensive industries were particularly hard hit. In the second half of 2007, the largest textile industry provinces faced a succession of textile business closures. The spate of bankruptcies grew worse in 2008. According to the NDRC Economic Operations Bureau of Statistics, in the first five 28 Interest Groups in China’s Economic Policymaking China Security · Issue 19 months of 2008, the cumulative loss in the textile industry reached nearly 10 billion RMB over the previous year, an increase of almost 3 billion RMB over the same period, an increase of over 42 percent. More than 10,000 small- and medium-sized textile enterprises shut down and two-thirds faced restructuring.11 Confronted with the worsening terrain, trade associations for labor-intensive enterprises began lobbying for slower RMB appreciation and repeal of cuts to export tax rebates. They argued that if the government did not intervene, a large number of labor-intensive enterprises would soon fail, thousands of workers would be laid off, and the livelihoods of the 20 million people employed in the textile industry would be threatened. In early March 2008, representatives of the China Textile Industry Trade Association (CTITA) toured the provinces of Jiangsu, Zhejiang, Guangdong, Hebei, Shandong and Fujian to survey damage to the local textile industries. They concluded that each province’s textile industry was facing imminent danger, with Guangdong’s outlook appearing the bleakest. After returning to Beijing, they summarized the situation in a report, requesting that MOFCOM and other senior departments “come to the rescue.”12 The trade association leaders’ report to the State Council stated that, due to the appreciation of the RMB, the textile industry’s average profit was only 3 percent, and if the situation continued the textile industry would face even greater difficulties. Therefore, CTITA requested no further cuts in the 2008 export tax rebate, contrary to the proposed rollback to 13 percent, so as to give the textile industry a chance to weather the difficulties. In May, the Chinese Chamber of Commerce for Import and Export Textiles (CCCT) surveyed the situation of the industry and submitted its report to MOFCOM, recommending an adjustment of textile trade policy.13 CTITA hoped for a two-point increase in the tax rebate rate to 15 percent, and CCCT argued the best outcome would be a “no levy, no rollback,” which would raise the rate to 17 percent.14 In the first half of 2008, the situation grew more serious as exports declined and the losses and bankruptcies of small and medium-sized enterprises mounted. Confronted with cries from businesses, the central government faced considerable pressure to raise the export rebate rate and maintain the stability of the RMB exchange rate. As a result, high levels of the central government toured key manufacturing centers, with particular attention paid to the textile industry. This kind of large-scale investigation and research is often a precursor to the government’s policy support.15 Besides central government leaders, the relevant government ministries such as MOFCOM, the Banking Regulatory Commission and the National Tax Administration also visited locations in Zhejiang, Guangdong, and elsewhere. Meanwhile, information on the decline of exports, the worsening of the employment situation, and the failure of businesses continually reached the central government through different channels. Some textile industry entrepreneurs and scholars used their positions in the National People’s Congress to deliver talks on the plight of the textile industry, requesting that the government raise tax rebate rates and maintain the stability of the RMB exchange rate. In early June, China’s industry authorities, the Ministry 29 He Xingqiang China Security · Issue 19 of Industry and Information Technology, issued an opinion letter aimed at solving the plight of the textile industry, compiling suggestions and recommendations from the NDRC, MOFCOM, Chinese Textile Industrial Association, China Cotton Association, PBOC and other departments. The recommendations focused on adjusting the export tax rebate to the previous level, adopting measures to the slowdown due the appreciation of the RMB and its effect on the textile and garment industry.16 In 2008, the textile industry, especially those with investors in Hong Kong and Taiwan, and businesses in Guangdong, went through various channels to continually exert pressure on MOFCOM. Their basic view was that the RMB had appreciated too quickly, hurting Guangdong’s export processing enterprises and interest. Reflecting the views of the textile industry, MOFCOM agreed to promote a stable textile export policy, thinking the textile industry had a comparative advantage in traditional labor-intensive industries. Moreover, the textile industry was seen as a crucial contributor to national employment, directly employing 23 million people and supporting the incomes of 100 million farmers. Thus the industry was key to China’s economic development and social stability. These expressions were identical to the reasons set forth by the textile industry.17 The downward slide in exports continued even as the financial crisis abated. The failure of many enterprises and resultant job losses became China’s most followed problem in 2008. This was no longer merely an economic problem but instead an issue of political stability. The central government thus began to repeatedly emphasize stable exports. If a constant rate of growth could not be maintained, unemployment would magnify the problem of the tide of migrant laborers returning to their hometowns, accompanied by the danger of social unrest. As a result, in the second half of 2008, the government’s policy took a 180-degree turn, raising product export rebate rate on three occasions. From the middle of July, the change in the scope of the US dollar’s exchange rate with the RMB narrowed to 6.81 to 6.85, a very small band. China’s exchange rate policy again returned to a pattern of a close peg to the dollar, and the RMB all but stopped appreciating. From July 2005 to July 2008, the PBOC’s promotion of RMB exchange rate reform also stopped, with exporting industries and MOFCOM’s viewpoint of maintaining exchange rate stability gaining the upper hand. It can be said that this was the result of pressure applied by the export industries. These conditions persisted until March 2010. The 2010 Rematch In the two years since the financial crisis, world trade has withered. Europe and the United States are seeking solutions to weak domestic demand and high unemployment. From early 2010, there was further escalation in Sino-US trade friction and accusations of the RMB being undervalued heated up again. In mid-April the US Treasury Department submitted to Congress its semi-annual report on interna30 Interest Groups in China’s Economic Policymaking China Security · Issue 19 tional economic and exchange rate policy, a test of whether or not China would again be accused of being a “currency manipulator”; with the G20 summit not far off, the RMB faced increasing pressure to appreciate. Domestically, forces once again appeared to push for exchange rate mechanism reform. During the March 2010 meetings of the National People’s Congress and Chinese People’s Political Consultative Congress, PBOC President Zhou Xiaochuan admitted that the fixed exchange rate of the US dollar and RMB between 6.82 to 6.83 was an “unconventional” policy.18 In other words, the RMB would, in the future, return to the pre-summer 2008 path of gradual appreciation.19 Some scholars who supported RMB appreciation also published their discussions arguing for the restart of exchange rate mechanism reform.20 The scholars argued that China is too reliant on external demand, the flaws of which were laid bare during the financial crisis. China wants to reduce its reliance on exports and RMB appreciation is a significant way to make this kind of change. Appreciation will not only protect against short-term inflation and deal with international pressure; more importantly, long-term sustainable growth will lead to better products, the stimulation of domestic demand and increase the RMB’s purchasing power. For exporting enterprises, RMB appreciation can also urge them to increase the value of their products, changing the reliance on low-cost, labor-intensive products, ultimately to the benefit of those enterprises. The voices of opposition also continued to recommend that the government maintain exchange rate stability. This time, MOFCOM struck a clear stance against RMB appreciation by being main voice of concern. This included the Foreign Trade and Economic Cooperation Research Institute under MOFCOM and the NDRC Foreign Economic Research Institute.21 MOFCOM, through its official public policy statements, reiterated many times that the RMB exchange rate would remain stable.22 Meanwhile, some manufacturing industries began to directly address the mainstream Chinese and foreign media to defend their own positions. The Chinese textile industry association vice president Gao Yong said that the average profit margin for the whole textile industry was between 3 and 4 percent, and unlikely to exceed 5 percent. If the RMB was to appreciate more than five points, half of the industry could die off.23 Under MOFCOM, the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME) on March 19, 2010 went so far as to extend a rare invitation to foreign and domestic media to attend a press conference on currency policy, expressing concern at US pressure for RMB appreciation.”24 At the press conference, industry executives repeatedly stated that RMB appreciation would lead to “one disaster after another,” especially since the increase in labor and raw material costs had already decreased their profits.25 From the end of February to early March 2010, domestic media organizations reported that MOFCOM and the Ministry of Finance had led a series of stress tests of labor-intensive industries to clarify the effect of changes in the RMB exchange rate on the textile, shoe-making, toy and other industries. Although both departments 31 He Xingqiang China Security · Issue 19 denied this news, many export, light industry and textile chambers of commerce admitted through various channels that they had gone through such tests. Machine import-export chamber of commerce still supported a policy of preserving exchange rate stability, as their analysts believed that “machine and electrical exports make up 60 percent of the country’s entire exports, and these enterprises’ profit margins are only 2 to 3 percent. If the RMB appreciates by 2 percent, businesses will have not profit; if it appreciates further, they will incur losses.”26 The aim of the RMB exchange rate stress tests was “for the purpose of understanding export enterprises ability to bear pressure, to provide evidence for maintaining exchange rate stability.”27 As one can imagine, in the sensitive time around March 2010, if MOFCOM had admitted to taking the lead on collecting and testing data, it would have been seen as exerting pressure diametrically opposed to the United States. This would have lead to controversy, and as such MOFCOM initially denied involvement. However, at an April public lecture on the transformation of world trade development pattern in Guangzhou, a MOFCOM official admitted these tests. He stated, “On the front line, MOFCOM regards the results of the RMB appreciation stress test as not reaching 2 percent, this data speaks for the entire industry.” In mid-March, led by MOFCOM Vice Minister Jiang Yaoping, MOFCOM’s Investigation and Research Group, the Ministry of Finance and the Tax Administration Leading Research and Investigation group arrived in Dongguan, Guangdong to investigate local industries. Although the investigation was not specifically formed to counter RMB appreciation, conducting these inquiries at such a sensitive time led people to think that MOFCOM was following these export industries with an enormous amount of interest. The stress test reflected MOFCOM’s representation of the export industry’s concerns over RMB appreciation, and its efforts at maintaining RMB exchange rate stability. During this time, the difference in opinion between MOFCOM and the PBOC over the RMB exchange rate was made public by the media. The CPPCC National Committee member and State Council Development Research Center of the Foreign Economic Research Department minister Zhang Xiaoji said in a March 10 interview that, on the exchange rate issue, the central bank, China Banking Regulatory Commission and MOFCOM naturally have disagreements or different views. Zhang stated that, “If these views were identical, that would be unusual.”28 Finally, on June 19, 2010, the PBOC announced that, in order to further push RMB exchange rate reform, it was increasing the elasticity of the exchange rate. This marked the official end of the RMB’s soft peg to the dollar that began in mid 2008 and signaled a new phase of development. The restart of RMB exchange rate mechanism reform indicates that the central bank’s viewpoint on continuing RMB exchange rate reform was officially adopted. After Zhou Xiaochuan’s March address, Premier Wen Jiabao’s position also supported this view.29 32 Interest Groups in China’s Economic Policymaking China Security · Issue 19 The Chess Match’s Prospects In the game of China’s interest groups, timing is the key to successful lobbying. The first time the central bank’s exchange rate reform program received the central government’s leaders support was in July 2005, because it conformed to China’s push to grow internal demand and drive balanced economic development. Next the government introduced measures to promote the upgrading of industry products, such as lowering the export rebate rate, further illustrating the government’s determination to change the pattern of economic growth. Cutting the rebate rate was a starting point for the transformation of high energy consumption and polluting industries, as well as a promotion of upgrading industrial exports, improving business competiveness, and cutting trade surplus. However, the financial crisis changed the direction of reform. China’s export enterprises, especially labor-intensive industries, began to quickly lose profits in 2007. In 2008 the financial crisis and decline in exports further aggravated the predicament of these enterprises, causing business failures and a large number of lay-offs. Representing a loosely formed group of export organizations, MOFCOM, with the financial crisis in the background, for its own interests stepped into the foreground to lobby. The time was ripe. The penetration of the financial crisis in China’s exports in the latter half of 2008 presented an extraordinary opportunity, with their lobbying receiving a very positive response. The Chinese government’s closer attention to RMB appreciation’s effect on social stability inevitably slowed exchange rate reform. The leadership’s main concern was that appreciation would not drastically improve the trade imbalance yet could result in consequences such as unemployment and related effects on social stability. This also implies that as long as exports have not completely recovered and large employment pressures exist, China will not adopt radical RMB appreciation strategy, especially not a one-off large appreciation. From the perspective of China’s policymaking system, even though the Party administers work in a politically unified way and the State Council is responsible for finance and economics, proposed policies must face a multitude of departments. Harmonizing policy between departments is regarded as very important. Some high-level policymaking and coordinating mechanisms, in reality, play key roles in policy decisions: for example, the Central Leading Group for National Security, Foreign Affairs Leading Group, the Taiwan Working group and the Financial and Economic Leading Group. The Finance and Economics Leading Working Group is led by the State Council Premier. In 2010, its membership included three State Council vice-premiers responsible for each aspect of the economy, the State Council Secretary General, the director of the NDRC, the Minister of Finance, the PBOC president, the State-Owned Assets Supervision and Administration Commission (SASAC) diIn the game of China’s interest groups, timing is the key to successful lobbying. 33 He Xingqiang China Security · Issue 19 rector, the chairman of the China Securities Regulatory Commission and the chairman of the Insurance Regulatory Commission. Although the leaders of Finance and Economics Small Working Group have decision-making power over currency policy, they belong to different ministries and commissions, which have interests in various trading companies, banking associations and export companies. The influences of these background interests have inevitably extended to foreign economic and trade policy formulation in the past. China’s leadership also places great emphasis on policy consensus within the government and even with the public. When the central government faces two opposing viewpoints within the government, it frequently adopts a compromise policy. Promoting RMB exchange rate mechanism reform has been an established policy since 2005, but it has continually faced challenges from interest groups opposed to currency appreciation. Under the goal of maintaining social stability, the interests of exporters must be cared for, pushing forward RMB marketization reform in very small and slow steps. This is the background of the June 2010 restart of RMB exchange rate mechanism reform. At present, the two opposing views are at a stalemate. Promoters of the central bank’s position believe that the financial crisis’ effect on China has already abated and exports have recovered, concluding the need for “special arrangements” such as the RMB’s hard peg to the dollar. Yet their opponents still believe that the state of exporting enterprises is fragile and RMB appreciation would be an attack on the tenuous recovery. Thus the central government faces the same choice it did in 2005: preserve export growth and try its best to limit RMB appreciation; or reduce the serious risk of losses in China’s foreign exchange assets by letting the market decide the RMB rate through supply and demand. Both are difficult choices and the final policy can only be a compromise between the two. The same small and slow steps as before have become the optimal choice. Even so, because the opposition voices are strong, the progress of exchange rate mechanism reform is very slow, even after the June restart of appreciation. It seems that high levels of economic policymaking are often caught in a dilemma, with the central bank and MOFCOM representing different policy interest groups and rendering conflicting proposals. Thus, it is most likely that the issue will be left unresolved, or perhaps will, according to the change in circumstances, make a relatively small transformation. 34 Interest Groups in China’s Economic Policymaking China Security · Issue 19 Notes 1 From July 2005 to July 2008, the RMB appreciated 21 percent against the US dollar. As the financial crisis swept the world, the Chinese government narrowed the range of exchange rate fluctuations to RMB 6.81 to RMB 6.85 against the dollar. On June 19, 2010, the People’s Bank of China announced the restart of exchange rate reform, widening the band within which it could fluctuate. Six months later the RMB had appreciated 2.4 percent against the dollar. 2 For example, imagine the central bank buys $100 entering into China by creating 650 yuan to buy the dollars. To prevent that newly created yuan from stoking inflation, it sells 650 yuan worth of bills to banks, effectively removing the 650 yuan from the economy. If the central bank pays 2 percent interest per year to banks on those 650 yuan in sterilization bills but earns 4 percent per year on the investments it makes in the United States with its $100, it has made a net profit of 2 percent interest per year. 3 Chen Jianfen [陈建芬], “Wu Xiaoling: Enterprises Should Adapt to Changes in the Exchange Rate, Not Call for Appreciation or Depreciation [吴晓灵：企业应该适应汇率变化 不要呼吁升值或贬值], Eastmoney.com [东方财富网], March 11, 2009. 4 Just as in other countries, many of the administrative departments and agencies are set up to deal with specific issues and tend to speak on behalf of the groups they represent. For example, this is similar to the Department of Agriculture representing the interests of American farmers over the interests of American citizens in general. It is often difficult to distinguish between the regulator and the regulated industry. See H.R. Mahood, Interest Groups in America National Politics: An Overview (Upper Saddle River, N.J.: Prentice Hall, 2000), p. 22. 5 For instance, former MOFCOM Vice Ministers Wei Jianguo and Chen Jian expressed in 2010 that RMB appreciation was a significant attack on exports, would have a negative effect on manufacturing and that the inflationary effect would be hard to reduce. 6 China National Bureau of Statistics, Institute of Economic Science and Monitoring Office, Analysis of RMB Appreciation’s Effect on Chinese Exports [人民币升值对我国出口的影响分析], July 22, 2008, http://www.nssc.stats.gov.cn/jcpjzhx/zhgjjjc/200807/t20080722_1336.html. 7 Yu Yongding [余永定], “Eliminating the Phobia of RMB Appreciation, to Achieve the Transition to Balanced Economic Development [消除人民币升值恐恐惧症 实现向经济平衡发展过渡],” September 2003. 8 崔宇：《中国央行智囊大换血的玄机》，《华尔街日报》中文网，2010年3月29日。“日本式陷阱”是中国国内关于人民币升值最为流行的说法之一，即现今人民币升值的情形同20世纪80年代日元面临升值的情况相似，人民币升值将导致中国步日本后尘，落入同样的长期经济衰退的陷阱。 9 Hui Feng, “The Politics of China’s Peg,” Government: Business, Foreign Affairs and Trade, Oct. 7, 2010. 10 “Yu Yongding: Opposing RMB Appreciation Because of Exports’ Low Profit Margins is Completely Wrong [余永定：因出口利润率低反对人民币升值是完全错误],” Phoenix Financial Report [凤凰财经报道], Aug. 15, 2010. Hu Xiaolian [胡晓炼], “The Successful Experience of RMB Exchange Rate Mechanism Reform [人民币汇率形成机制改革的成功经验],” People’s Economic Channel [人民网经济频道], July 30, 2010. 11 Teng Xiaomeng [腾晓萌], “The First Step in Saving the Textile Industry: Rollback the Export Rebate 2 Percent [纺织业救市第一步：出口退税率部分回调2%],” 21st Century Business Herald, http://finance.sina.com.cn/roll/20080801/02045154886.shtml. 12 Suo Hanxue [索寒雪], “High Courage: The First to Ask for Help [高勇：最早求援者],” China 35 He Xingqiang China Security · Issue 19 Businesss [中国经营报], Dec. 27, 2008, http://www.cbmedia.cn/html/32/n-3132.html. 13 Teng Xiaomeng [腾晓萌], “The Textile Industry ‘Bailout’ Will Increase the Export Tax Rebate [纺织业酿“救市”出口退税率或将提高],” 21st Century Business Herald [21世纪经济报道], http://money.163.com/08/0627/09/4FEFSPRA00252G50.html. 14 Teng Xiaomeng, “The First Step in Saving the Textile Industry: Rollback the Export Rebate 2 Percent.” 15 Intensive research and investigation began in early July. Prime Minister Wen Jiabao visited Jiangsu and Shanghai; Vice President Xi Jinping inspected Guangdong; Minister of Commerce Chen Deming and Vice Premier Li Keqiang went to Hangzhou and Wenzhou; and Vice Premier Wang Qishan visited Shandong. 16 Zhang Bin [张斌], Textile Export Tax Rebate Rollback in Sight, a Weathervane for RMB Exchange Rate [纺织出口退税回调在望，风向标人民币汇率],” The Financial Network [金融界网站], http://finance1.jrj.com.cn/news/2008-06-07/000003734763.html 17 “MOFCOM: Take Active Measures to Maintain Stable Textile Exports [商务部：积极采取措施保持纺织业出口稳定],” China Logistics [中国储运], No. 11, 2008, p. 131. 18 Cui Ye [崔烨], Foreign Media Interprets Zhou Xiaochuan’s Speech, Speculates Excessively on Signals of RMB Appreciation [外媒解读周小川讲话，过分炒作人民币升值信号],” Evening News [新闻晚报], March 9, 2010, http://www.chinanews.com/cj/cj-gncj/news/2010/03-09/2159451.shtml 19 “RMB Appreciation Again a Choice: Slow Appreciation Gradually Becomes the Consensus of Industry, Government and Academia [人民币升值再抉择：缓步升值渐成产官学共识],” New Century [新世纪], March 15, http://business.sohu.com/20100315/n270820072.shtml. 20 For example, Peking University Development Research Institute Associate Dean Lu Feng. 21 The director of MOFCOM’s International Trade and Economic Cooperation Research Institute, Huo Jianguo, published and article in early 2010, stressing that strong appreciation of the RMB was not conducive to the stable development of China’s economy, nor to global economic recovery. Zhang Yansheng, director of the NDRC Foreign Economic Research Institute, stated that, “After appreciation, mechanisms forced enterprises to increase efficiency, and this effect could be seen during the last appreciation. But it was very limited. If appreciation is excessive, the company cannot afford it and will go in a negative direction.” 22 From February to March 2010, MOFCOM spokesperson Yao Jian stated multiple times that China’s export industries’ recoveries were still slow and that they could only talk seeking growth after they survived the crisis. Whether for the survival of businesses or domestic employment, a stable exchange rate was primary policy objective. MOFCOM Vice Minister of Commerce Zhong Shan described state of export industries in dramatic terms: “If the water is heated to 99ºC, it is not boiling; but then continue to rise as long as 1ºC, the water will boil. Any degree of further appreciation of the yuan will likely bankrupt exports business, which China can not afford.” 23 Xu Yunqian [徐芸茜], The Plight of the Foreign Trade Enterprises: If the RMB Appreciates 5%, Half the Textile Industry Will Die Off [外贸企业困境：人民币升值5% 纺织企业死一半], China Times [华夏时报], April 9, 2010, http://finance.sina.com.cn/roll/20100409/21577722263.shtml 24 China Machinery and Electronic Products Import and Export Chamber of Commerce Zhang Yujing stressed that letting the RMB appreciate more than in 2005 would result in dire consequences: “At that time the government went through full research before adjusting the RMB exchange rate 2 percent, but now with the effects of the financial crisis, companies have already unearthed their full potential, a lot of work that already counts for nothing. Under these conditions, I think that many companies cannot afford the consequences of revaluation.” 36 Interest Groups in China’s Economic Policymaking China Security · Issue 19 25 “Chinese Exporters to Maintain Currency Stability Lobbying,” Wall Street Journal (China Edition), March 24, 2010. 26 Xun Yunqian [徐芸茜], “RMB Appreciation Game 30 Days, MOFCOM Stress Test Done but not Said [人民币升值博弈30天 商务部压力测试只做不说],” China Times [华夏时报], March 26, 2010, http://finance.sina.com.cn/roll/20100326/21277642337.shtml 27 “MOFCOM Stress Test Result: Businesses can Bear RMB Appreciation Below 2 percent [商务部人民币压力测试结果：企业可承受人民币升值不到2%],” The Economic Observer [经济观察网], April 17, 2010，http://www.eeo.com.cn/Politics/beijing_news/2010/04/17/167935.shtml 28 Xu Yunqian [徐芸茜] and Wu Lihua [吴丽华], “RMB Appreciation Expected to Increase Subtle Divergence between PBOC and MOFCOM [人民币升值预期加强 央行商务部微妙分歧],” China Times [华夏时报], March 12, 2010, http://finance.sina.com.cn/money/forex/20100312/22157557159.shtml 29 In resposne to journalists’ questions at a March 2010 press conference, Wen Jiabao said, “We will push RMB exchange rate mechanism reform a step further, keeping the RMB exchange rate at a reasonable and balanced level of basic stability.” This was in response to Zhou Xiaochuan’s speech a few days before supporting exchange rate reform.