The effect of appreciation of RMB on investment in China

The appreciation of RMB has great effect on Chinese export and import, investment policy, debt issues and the inflation problem.

China is an exporting superpower. Chinese people rely on sells of export a lot. The kinds of products we export can be simply divided into 2 parts: primary products and processed products.

The primary products, like paper, woods, ferrous metals (metals with iron), will be exported less. This is negative for the economy of the country in a short time. However, in the long terms, this is beneficial to the country because the limited resources can be saved which can help adjust the industrial structure. After all, China is not a country with rich resources. We have large amounts of people to consume them. What’s more, we may save the money for environmental problems of making primary products.

The processed products, like technological products, cars, machines, foods, toys, are highly influenced by the changes of currency prices. If the price of RMB rises, the products exported will become more expensive. The consumers in other countries will be more eager to purchase the cheaper products (maybe the products of their own country or other countries). This is hard for the country whose export occupies 30%-40% GDP. That is to say, output is quite important for the country.

These years, Chinese input has increased. We can also divide the input products into 2 parts as above.

About the primary products, we mainly talk about the energy products. The percentage of coal consumption is about 65% to 70%. Most of the coal is produced locally. That mains we basically use the energy produces by ourselves. On the other hand, the percentage of oil is about 20% to 25% according to the report of Chinese government. Most of them rely on the input. This is also not a small figure in that the energy we consume is quite huge. If the price of RMB becomes lower, the price of oil is relatively lower. We can use less money to buy more oil. In this sight, the appreciation of RMB is beneficial.

Here come the processed products. The kinds of processed products are the same as the export products. If the appreciation happens, the price of the import will become quite cheap. Chinese people will start buying more foreign products and give up their local products. This will be a great loss for the country because the market of China is very large. If you lose the market, you lose everything. The economy of the country will meet its period of stagnations.

The appreciation issue will also influence the investment policy.

The first is about the negative influences. As the prices of RMB rises, the currency will not be so attractive to foreign investors. The reason is the cost of investment is quite high. That may be good for the local company for they will face fewer competitors. They can have more freedom to control Chinese market. However, that is negative for the corporation of local companies and foreign companies. The technological research abilities of China are far from super big countries like the US and Japan. We really need to learn more from these countries. If they do not invest and supply technological support, we will lose the competitive ability in the world.

The second is about the positive influences. We have mentioned that we will lose some investment from other countries, but our investment to other countries will increase. We can find the evidence from some figures. Since the exchange reform in 2005, the appreciation of the RMB at a stage of excess domestic liquidity and the international context of economic imbalances, the government encourages the development of foreign direct investment. With close to 10% economic growth in 10 years, China’s foreign direct investment has a rapid growth. The reason of it is quite clear. The cost of external investment is quite low. The asset and resources of foreign countries become more attractive to Chinese investors. They are relatively cheap. Another reason is the lower financing cost. The lower the cost, the higher the return on invested capital.

The RMB currency changes will also arouse foreign debt problems. As we all know, China is a country with huge amounts of foreign debts. The latest number is USD863.167 billion, which exclude the debt of Hong Kong, Macau and Taiwan. So if the price of RMB becomes higher, the foreign countries need to pay less for their debt. If America borrows USD10 from China, it needs to pay back RMB60. If the RMB price appreciates, it only needs to pay back less than RMB60. That means we lose part of the money. So if the number is USD863.167 billion. A little change leads to a great loss.

Finally, the inflation problem is quite easy to understand. The rise of the currency makes the inflation mute. We can use less money to buy more products. On this aspect, it’s positive for the country.

All in all, the appreciation of RMB has good parts and bad parts. It’s good for the primary products import and export, the external investment and inflation. And it’s bad for the processed products import and export, the internal investment and foreign debt. We really need to find which currency policy will get more benefits and carry out it.

By Daxue Consulting

See more at:

http://www.sjgrand.cn/investing-china

http://www.reuters.com/article/2014/12/09/markets-china-idUSL3N0TT28R20141209

http://www.ft.com/cms/s/0/95372ce6-7f79-11e4-b4f5-00144feabdc0.html

http://gulfbusiness.com/2014/12/uae-activate-5-7bn-china-currency-swap-soon/