Abstract The directional regulation of tax reduction will not only help to promote the adjustment and optimization of China's economic structure, but also help to deal with the devaluation of the RMB exchange rate. The current Fed rate hike may trigger pressure on the depreciation of emerging economies, and the depreciation of the RMB exchange rate may be stronger. In this case, tax cuts...
The directional regulation of tax reduction will not only help to promote the adjustment and optimization of China's economic structure, but also help to deal with the devaluation of the RMB exchange rate. The current Fed rate hike may trigger pressure on the depreciation of emerging economies, and the expectation of depreciation of the RMB exchange rate may be stronger. Under this circumstance, the policy of tax reduction rather than depreciation is more suitable for China. In recent years, influenced by factors such as the Fed’s interest rate hike, many countries in the world, especially emerging economies, have experienced significant depreciation against the US dollar. Although China's RMB exchange rate adopts a managed floating exchange rate system, the RMB has remained linked to the US dollar for a long period of time, so that the RMB exchange rate has appeared to appreciate against the US dollar, causing the RMB to appreciate against other currencies.
Since the reform of the central parity mechanism of the RMB exchange rate in August 2015, the RMB and the US dollar have accelerated the phenomenon of “decouplingâ€. The RMB has a strong depreciation expectation against the US dollar, and the capital outflow pressure is relatively high. Some commentators believe that the depreciation of the renminbi should be accelerated to solve related problems. At the same time, the relevant policy departments said that the renminbi has not been greatly depreciated, and how to resolve the current passive situation has become a difficult problem for the current macro-policy departments.
The first thing that should be clarified is whether the RMB exchange rate has a basis for a large depreciation. According to economic theory, the direct indicator of whether a country’s exchange rate should depreciate is the country’s balance of payments situation. If the balance of payments surplus, then the country's currency has no basis for depreciation, and vice versa. Although China's balance of payments surplus has declined to some extent in recent years, it has not changed the pattern of surplus, so theoretically the RMB exchange rate does not have a basis for significant depreciation.
In addition, China still has about 3.5 trillion US dollars of foreign exchange reserves. If the foreign exchange assets of CIC are included, the total foreign exchange reserves will reach about 4 trillion US dollars. Such a huge foreign exchange reserve clearly indicates the depreciation of the RMB exchange rate. Not big, otherwise if the foreign exchange reserves are sold to the world's conventional level, then the RMB exchange rate may have upward pressure in the short term.
In this case, why does the current RMB exchange rate have a strong depreciation expectation? The core reason is that the currency of most countries outside the United States has unilaterally depreciated against the US dollar. The peg to the US dollar has made the RMB appreciate faster than other currencies. This appreciation is not the result of a sharp increase in China's balance of payments surplus, nor is it the support of China's sustained economic growth, but only because the RMB exchange rate basket is focused on the US dollar. The outside world therefore believes that this situation lacks the support of the real economy and is not stable. It is difficult for the RMB exchange rate to continue to appreciate against other currencies. Under this circumstance, the expectation of the weakening of the RMB exchange rate will gradually increase.
If the depreciation of the RMB exchange rate is not expected to be eliminated, then the pressure on the RMB exchange rate depreciation may be difficult to alleviate. However, if the RMB exchange rate is gradually depreciated in a small step or depreciated sharply at one time, the pressure on short-term capital outflows may suddenly increase, and China's international financial stability may be affected. Further, if this move triggers a competitive devaluation in other countries, then China's renminbi may face new depreciation pressure, which is not only unfavorable to China's economic development, but may also have a greater impact on the international economic and financial environment.
It can be seen that the policy of choosing the depreciation of the RMB exchange rate is not wise. It is an important issue to choose what alternative policy to ease the pressure of RMB depreciation. According to the Balassa-Samuelson theory, if a country's currency exchange rate has depreciated pressure but does not let it depreciate, then the country may face the risk of falling prices, that is, the problem of deflation. Since the beginning of this year, China’s deflationary risks have warned that it is necessary to speed up the search for policies to alleviate the pressure of the RMB exchange rate depreciation.
Combined with China's actual situation, the biggest problem of deflation is that the profits of enterprises are narrowing, but tax cuts will help solve this problem. Tax reduction will help reduce the cost of enterprises, increase the profitability of enterprises, and promote the appropriate price reduction of related commodities, making related products more internationally competitive. As a result, the real effective exchange rate of the renminbi will fall, the expectation of RMB depreciation will be lowered, and the pressure on the depreciation of the RMB exchange rate will be alleviated. Therefore, tax cuts are expected to become a possession strategy to alleviate the pressure of RMB exchange rate depreciation.
Although tax cuts can achieve similar results as depreciation, why is tax cuts more attractive? On the one hand, tax cuts fall within the scope of a country's domestic macro-policies. Tax cuts are often seen as an important tool for expansionary fiscal policies. Consistent with China's current proactive fiscal policies, large-scale tax cuts are unlikely to cause doubts in other countries. It is also unlikely to trigger the issue of competitive exchange rate devaluation. On the other hand, China is currently in the transition period of structural adjustment. The targeted tax reduction and control measures will promote the development of emerging industries, curb the expansion of industries with high pollution and high energy consumption, promote the optimization of China's industrial structure, and contribute to China's macroeconomic Economic stability, in turn, provides support for exchange rate stability.
On the whole, the targeted adjustment of tax reduction will not only help to promote the adjustment and optimization of China's economic structure, but also help to deal with the depreciation of the RMB exchange rate. The current Fed rate hike may trigger pressure on the depreciation of emerging economies, and the expectation of depreciation of the RMB exchange rate may be stronger. Under this circumstance, the policy of tax reduction rather than depreciation is more suitable for China. Strengthening the coordination of the Ministry of Finance and the People's Bank of China [microblogging] and other departments, and implementing the tax reduction, especially the targeted tax reduction, will be the strategy to resolve the current exchange rate financial risks and promote economic development. (The author of this article: Deputy Director and Associate Professor of the World Economics Office of the International Strategy Institute of the Party School of the Central Committee of the Communist Party of China.)
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