WORLD TRADE  
ORGANIZATION   
WT/WGTDF/W/66 
24 September 2012  
 
(12-5123) 
Working Group on Trade, Debt and Finance Original:   English 
  
 
RMB EXCHANGE RATE IS CURRENTLY STAYING AT A REASONABLE LEVEL 
 
National Academy of Economic Strategy, 
Chinese Academy of Social Sciences 
 
Yang Shengming, Feng Lei, Xia Xianliang 
 
 
While attending the G-20 Cannes Forum Summ it, Mr Chen Deming, the Chinese Commerce 
Minister said in a media interview that, RMB ex change rate was within a reasonable range in 
substance.  We believe that his claim accord s with actual situations of both China and the 
United States.  So, his conclusion shall be publici zed and provide a basis for China to stabilize its 
currency policy.  
I. SOCIAL LABOUR PRODUCTIVITY IS  THE DETERMINANT FACTOR FOR A 
REASONABLE EXCHANGE RATE 
Different theories explain the formation of exch ange rate from different perspectives.  Some 
scholars proposed that, the total factor productivit y shall be the value basis that determines the 
exchange rate for a currency, but we believe that, labour creates value, so it is more rational for the 
United States to take labour productivity as the value b asis for exchange rate.  Marx's Theory of Labor 
Value and Theory of International Value elaborat e in essence that, the determinant for one nation's 
currency exchange rate shall be its social labour pr oductivity, which explains the fundamental reasons 
for the exchange rate formation and fluctuati on.  This theory may also account for current 
RMB exchange rate.  The rationality of the exchange  rate depends on the whether or not the exchange 
rate has truthfully reflected the currency va lue and the variations in demand and supply. 
 
Like other currencies, RMB exchange rate is  influenced by political, economic and many 
other factors, among which the fundamental determinan t one shall be the social labour productivity.  
Determined by social labour productivity, the RMB exchange rate, or say, th e imbedded value of per 
unit RMB determines the exchange value of RMB with other currencies.  Additionally, the historical 
quantity of supply and demand of th e two currencies in free circulation and their current changes may 
also pose certain impact on the exch ange rate.  The price parity of th e exchange rate deviation in the 
market related to the currency value depends on th e difference between the demand and supply in the 
market.  In the following part, the exchange rate of  RMB will be explained at a reasonable level from 
two perspectives, i.e., the value basis an d the balance between supply and demand. 
 
In recent years, the changes in social labour productivities in both China and the United States 
and their comparative relation show that, the exch ange rate of RMB with the United States dollar 
ranged within a reasonable interval.  
Firstly, compared with the United States dolla r, RMB has been appreciating because of the 
improvement in China's social labour productivity , and RMB exchange rate with US$ shows an 
obvious correlation with the social labour produc tivity.  Based on the unchanged price of US$ 
in 1990, by virtue of purchasing power parity method, the ratio of the United States social WT/WGTDF/W/66 
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  labour productivity over China's in different year s are as follows:  12.6 times in 2000, 8.9 times 
in 2004, 8.3 times in 2005, 7.4 times in 2006, 6.6 times in 2007, 6.1 times in 2008, 5.7 times in 2009 and 5.4 times in 2010.  From above we can see that, China's social labour productivity has been relatively increasing to the United States.  Accordingl y, since the implementation of floating exchange 
rate system, the exchange rate of RMB with US$ has risen from 8.28 RMB/US$ in 2004 
to 6.77 RMB/US$ in 2010.  The trend of appreciation of RMB coincides with that of social labour 
productivities in both countries.  
Secondly, difference in social labour productivity is the fundamental factor that may make 
clear the divergence about the RMB exchange rate  between China and the United States.  We know 
that, in 2010, the social labour productivity of the United States is about 5.4 times that of China.  
In other words, in the bilateral trade between Ch ina and US, China exchanges goods with 5.4 working 
days for one working day in the United States.  In ge neral, this difference in social labour productivity 
demonstrates the range that RMB exchanges with US$.  
Since the international financial cr isis in 2008, both Chinese economy and 
American economy have been impacted at varying degrees, and the growth rates in social labour 
productivities of both countries have been slowing dow n.  However, the Unit ed States suffers from 
heavier influence by this crisis than China.  As a result, the growth in so cial labour productivity of 
China should be greater than that of the United Stat es.  Or say, from 2008, the exchange rate of RMB 
with US$ shall continue to appreciate over US$.  In terms of the RMB exchange rate, in 2008, 
RMB 6.95 may exchange US$1, and in 2010, only RMB 6.77 may exchange US$1.  From this 
perspective, there is a remarkab le positive correlation between the improvement in Chinese social 
labour productivity and the exchange rate of RM B over US$.  Then, we can see that, current 
RMB exchange rate reflects the obj ective reality that the growth in China's social labour productivity 
is higher than that of the United States.  That's  to say, the exchange rate of RMB with US$ is 
generally reasonable at a fundamental perspect. 
 
Table 1.  Comparison on Annual GDP Contri bution from Each Employee (Purchasing Power 
Parity Method Based on the Unchanged Price of US$ in 1990) 
Year 
Country 2000 2004 2005 2006 2007 2008 2009 2010 Increase of 
2010 over 
2000 (%) 
China 4,660 7,048 7,710 8,620 9,768 10,638 11,540 12,593 170.2 
US 58,622 62,977 63,800 64,294 64 ,825 65,114 65,848 68,126 16.2 
Ratio 12.6:1 8.9:1 8.3:1 7.4:1 6.6:1 6.1:1 5.7:1 5.4:1 --- 
 1US$= RMB 
(Annual 
average price) 8.28 8.28 8.19 7.97 7.60 6.95 6.83 6.77 A total 
appreciation 
of 22.3% 
since 2005 
Source : ILO statistics, http://kilm.ilo.org/kilmnet/;  Chin a Statistical Yearbook 2011;  China Statistical 
Press 2011. 
Note: For easy calculation, in the Table above, RMB exchange rates have been processed based on the 
rounding principle.  WT/WGTDF/W/66 
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  II. PRODUCTION FACTOR PRICE IS ANOTHER IMPORTANT FACTOR 
INFLUENCING THE RATIONALITY OF RMB EXCHANGE RATE 
On the issue of RMB exchange rate, China f aces a double pressure that "high inside and low 
outside":  internationally, China faces a pressure th at the United States asks RMB to appreciate, while 
domestically, RMB faces a pressure of depreciation. 
 
Why did China get trapped in such a dilemma?  Aside from the fundamental factors of huge 
difference in social labour productivities of Ch ina and US, another factor is the low price of 
fundamental production factors in China, which promin ently appears to be three low prices regarding 
labour, resource and environment.  If we measure th e exchange rate of RMB based on these three low 
costs, the current RMB exchange rate seems on the high side, or say, RMB has a "virtual 
appreciation".  
RMB exchange rate, also the price of RMB, is the total price for all imports and exports of 
China.  So, this price shall accord with different commodity prices inside China, especially the price 
of production factors.  If it was low, then, RMB ex change rate based on the price will not be high.  
In terms of this, if we want to resolve the dis pute on RMB exchange rate, we must know about, then 
try to solve the problem of low factor price inside  China.  The good news is that, in recent years, 
the labour cost, energy cost, resource cost and environment cost in China have all been climbing.  Such increases greatly promoted the formati on of a reasonable exchange rate of RMB. 
 
Among different prices of production factors, la bour cost (salary) is of top priority.  
Therefore, we shall pay close and high attention to  the correlation of labour price and RMB exchange 
rate.  In Table 2, we list the comparison of employee compensations (salaries) in the manufacturing sector in both China and the United States.  
Table 2.  Comparison of compensation (salaries) of employees from manufacturing sector 
in China and US:  2000, 2005-2007 
Country Units 2000 2005 2006 2007 
US US$/Hour 24.6 29.7 30.0 30.6 
China RMB ⁄month 729 1313 1497 1740 
RMB/Hour 4.1 7.5 8.5 9.9 
US$/Hour 0.5 0.9 1.1 1.3 
Ratio  49:1 33:1 27:1 24:1 
Source : ILO database, and quoting from the International Statistic Yearbook (2011), page 147, 149 and 335, 
which was compiled by the National Bureau of Statistics of P.R.C. and published by the China Statistical Press in January 2011. 
Note: Currency exchange for convers ion adopts the annual average pri ce that year, and each month with 
22 working days and eight hours for each working day. 
There is a huge difference in average comp ensation of employees from the manufacturing 
sector in China and the United States.  In 2000, the ratio was about 49 to 1, and 24 to 1 in 2007.  
Though a great improvement has been seen in the ra tio in just a few years, today, the average 
compensation of employees from the manufacturing sector  in China is still very low.  From this 
perspective, the RMB exchange rate is bubbly high.  
The RMB exchange rate re-evaluation pressure is  mainly caused by the low factor price in 
China.  So, we shall focus on the increase in factor price rather than the exchange rate appreciation.  
In terms of export, a relatively strong compet ence of Chinese products mainly comes from the WT/WGTDF/W/66 
Page 4  
 
  low export cost brought by low factor price and the rapid growth in labour productivities, not from the 
undervalued RMB exchange rate.  
III. THE STRUCTURAL AND INSTITUTIONAL FACTORS LEADING TO A 
REASONABLE EXCHANGE RATE 
1. The exchange rate of RMB to US$ reflects the structures of bilateral trading and 
investment between the United States and China 
China's bilateral trade surplus w ith the United States is mainly contributed by labour-intensive 
products which America relies heavily on imports that determined by US's resources endowment, 
even from a few labour intensive industries that the United States has already exited or basically 
exited.  And the United States h as comparative advantages over China in technology intensive 
industries and service trading.  China's commodity tr ading surplus is the resu lt of differences between 
China and the United States in resource structure, economic structure and deve lopment level, but not 
the result of RMB undervaluation.  
The benefit of China's commodity trade surplus with the United States is, to certain extent, 
offset by China's trade deficit in service trading w ith US, and also offset by the huge return of 
US's investment and sales in China.  Comparing the general benefit of trading and investment, US's is 
far greater than China's in terms of size and amount.  
2. RMB exchange rate reflects China's multilateral trading relations 
RMB exchange rate is determined based on the b asket of currencies.  The exchange rate of 
RMB with US$ considers not only China's trade balan ce with US, but also the trading relations with 
more than 200 countries or regions in the globe.  In  fact, China has surplus with the United States 
and EU, but has a large deficit with Japan, South Ko rea and Southeast Asian countries.  The exchange 
rate of RMB reflects a multilateral trading relati ons other than a bilateral relationship with a 
specific country. 
 
3. The exchange rate of RMB reflects China's foreign economic and trading relations as 
well as its own economic development requirement 
Thinking about RMB exchange rate, we shall not only take into account our trade balance, 
but also international capital flows, personnel transf er, foreign exchanges and international payments 
as well as other factors.  China's determination on a reasonable exchange rate of RMB in 
consideration of its own economic development and international econom ic benefits is a matter within 
its sovereignty.  As a non-basic currency in the wo rld, the international position determines that the 
passive change in RMB exchange rate shall only answer for its own econom ic development and its 
own national strategy. 
 
IV. IT IS NOT SUITABLE TO BE EXPLAINED MECHANICALLY BY THE 
WESTERN EXCHANGE RATE THEORIES 
There are many Western theories on the determinati on of exchange rates.  It mainly includes:  
Theory of International Indebtedn ess, Purchasing Power Parity Theory, Theory of Interest Rate Parity, 
Theory of International Payments, Psychological Th eory of Exchange, Theory of Currency Analysis 
and Theory of Financial Asset Portfolio, etc.  These theories consider the supply and demand of 
foreign currency as the basis for determination of exch ange rate.  In Western exchange rate theories, 
the preconditions for theories of supply and demand of foreign exchange in the market are based upon 
an equal market of two currencies for exchange, a perfect market system, and unlimited supply and demand and only a slight unbalance.  WT/WGTDF/W/66 
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  As for the determination of RMB exchange rate , if measured by means of the balanced supply 
and demand in the foreign exchange market, factors such as unequal status of RMB with other world 
currencies, an imperfect financial system in Chin a, a heavy unbalance in the supply and demand of 
foreign exchanges will impair the reasonable dete rmination of RMB exchange rate.  Till today, 
RMB is still a national currency instead of a world currency.  Presently, the foreign exchange market 
has not achieved a robust status in China, and we lack of foreign exchange speculators or dealers 
above specific size with expertise.  The foreign exchange reserve held by Chinese Government for 
stabilizing the national financial system is a Stat e-owned asset based on long-term accumulation, so it 
cannot be considered as an effective market suppl y.  As a result, Western theory of supply and 
demand of foreign exchange cannot be  applied mechanically in the dete rmination of the exchange rate 
of RMB.  Today, Chinese Government is trying to gradually promote the diversification of exchange 
holding, sources and demands.  But it will take a long  time for China to improve its formation scheme 
of RMB exchange market.  The market to form excha nge rate still is not work in effective in China 
by now.  
Influencing factors for changes in foreign exchange rate include a nation's balance 
of international payments, foreign exchange reserve, its financial position, economic growth, 
interest rate, financial system, exchange policy an d various factors that cause changes in the value 
of foreign currencies.  In essence, in a comple tely free market, the exchange rate between 
two currencies is determined by their relative intrin sic value, while the changes in the supply-demand 
balance of foreign exchange may only influence the exchange rate to fluctuate in certain degree, 
but cannot play a decisive role on the exchange rate level.  While in an incomplete market, 
the exchange rate is primarily determined by th e Government according to the nation's social and 
economic development requirement, and the official ex change rate may serve as a guide for the actual 
exchange rate.  
We may not view the theory of determinati on of exchange rate by supply and demand of 
foreign exchange as a simple dogma, and we shall ca pture the essence that a cu rrency's exchange rate 
depends on the relative intrinsic value among currenci es or the nations' relati ve economic strengths.  
The indicators such as China's trad e surplus, international payments and foreign exchange reserve 
cannot scientifically judge that RMB exchange rate has been undervalued and ask  RMB to appreciate.  
If RMB exchange rate appreciation deviated from th e actual intrinsic value of two currencies, it will 
require an effective market mechan ism to adjust and the cost for adjustment will be huge, or may even 
cause China to face long-term deflation and economic slowdown.  At present, RMB foreign exchange 
rate cannot fully depend on the market.  China should learn the lessons from the fact that in those days, the United States forced Japan to appreci ate its yen to adjust the unbalance of US-Japan 
trading and caused the irrecoverable damage to Japanese economy, and the current Sino-US trading 
relation cannot compare with the Japan-US trad ing relation then.  US's successful rebalance 
of Japanese-US trading relation by exchange rate adjustment shall not be copied in Sino-US trading relation.  
V. CURRENT ECONOMIC SITUATION REFLECTS RMB EXCHANGE RATE 
STAYING AT REASONABLE LEVEL 
RMB exchange rate appreciation partially re flects the healthy and stable growth in 
Chinese economy and the low production factor price in  China, and partially is forced because of the 
decline in gold content of US$, euro, dollar and ot her currencies.  After a constant appreciation, 
RMB exchange rate has entered a balanced stage of fluctuation, and this not only reflects the 
downgrade in Chinese economic growth forecast, but al so reflects the influe nces from the weak world 
economic growth and the grim prospect of ec onomic recovery in major developed countries. 
 
In 2011, China experienced a slowed export growth, a faster import growth, a decline in 
foreign trade surplus, a slowed foreign investment  growth, a faster foreign capital outflow, a decline WT/WGTDF/W/66 
Page 6  
 
  in current account surplus and a slight decline in its  huge foreign exchange reserve.  All these tell the 
United States that, the size of China's foreign exch ange reserve is reversible, and the problem of 
excessive growth in foreign excha nge reserve has been relieved. 
 
International investors tend to expect a slower economic growth in China, inflation and real 
estate and other asset bubbles have also been weakeni ng, and the broad money growth saw a slump.  
As a result, foreign hot money gradually loses expectation on RMB appreciation.  Based on their evaluation on world economy and Chinese economy, so me international foreign exchange investors 
are no longer optimistic about the appreciation of RM B, and they all buy in US$ and other foreign 
exchanges to close a position for arbitrage.  As a result, US$ begins to go strong. 
 
Since China's RMB exchange rate reform in 2005, RMB exchange rate with US$ has 
appreciated over 31 per cent in all.  Since the re starting reform in the second half of 2010, RMB has 
appreciated more than 8 per cent in all.  Then, th e market begins to suspect that if RMB is still 
undervalued and if it can be appreciated any more. 
 
From October 2011, the RMB exchange rate to US$ has been repeatedly fluctuating around a 
rate of US$1 to 6.32 RMB Yuan, and this tells th at, RMB exchange rate is at a balanced and 
reasonable level.  
Figure 1.  The RMB-US$ Reference Exchange Rate during the Period 
from 10 October 2011 to 9 March 2012  
 
Source : SAFE (China's State Administration of Foreign Exchange), 
http://www.safe.gov.cn/model_safe/tjsj/rmb_list.js p?ct_name=RMB reference exchange rate 
&id=5&ID=110200000000000000 
In addition, we can also measure the reasonable level of RMB exchange rate from the 
following aspects: 
 
 First, inflation and asset bubbles lead to a phenomenon that many commodity prices (except for labour price) in China are much higher th an in the United States.  Besides heavy indirect 
taxes, in the background of increasing governmental  debt, expanding administrative system, real tax 
burden is more likely to increase than to decrease. 
  WT/WGTDF/W/66 
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   Second, the TFP (total factor productivity) growth is slowing.  The fundamental cause for this 
is that, increase in the percentage of Government  economy and decrease in foreign investment growth 
and foreign trading growth may restrain the technical progress. 
  Third, at present, the real interest rate is  too low, monetary expansion too rapidly and the 
capital allocation is not efficient.  Sank capita l including accumulated non-performing asset increases 
in the financial system.  If the money growth sl ows down, the problem of distressed assets will be 
more obvious.   Fourth, export growth is slowing down, import growth is starting and trade surplus begins 
to decrease.  Today, Chinese export enterprises are facing a number of difficulties such as weakening 
international demand, increasing export cost and trad e protection policies by major trade partners.  
As a result, in coastal regions, enterprises in pr ocessing trading and labour intensive industries are 
gradually losing their international competitiven ess, and some enterprises begin to move to 
Southeast Asia and Central or Western China.  Mo re seriously, more and more SMEs went bankrupt. 
 
 Fifth, the real unemployment rate is high in China.  Due to the difference in the 
unemployment statistics method in China and the Western world, a considerable quantity of 
unemployment population are not registered or c ounted, a serious invisible unemployment exists 
in China.  In order to maintain employment stab le and alleviate the unemployment problem, we have 
sufficient basis for a stable RMB exchange rate and a stable financial environment. 
 
 Sixth, with the deepening of China's foreign ex change reform, residents' intentions to buy and 
use foreign exchanges are strengthening.  As a r esult, the demand on foreign exchanges in RMB will 
grow rapidly.  
 Though a reasonable and balanced RMB exchange  rate may provide an important opportunity 
and ground for increasing the flexibility of foreign ex change rate and the market-oriented reform for 
exchanges rate, the foundation is not so solid today.   Then, it is impossible for the Government to 
propel the exchange rate reform too fast.  It is advisable for the Government to increase the flexibility 
to test on the market, and prepare to intervene at  the same time.  If there is no excessive volatility, 
the Government may gradually permit to enlarge the fluctuation range or say the flexibility.  
Eventually, it may allow th e market to form the exchange rate  by transaction, so as to establish an 
exchange rate market mechanism.  
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