Could you imagine the yuan’s exchange rate with the U.S. dollar reaching 5?
At the end of 2019, the exchange rate was in the neighborhood of 7. I attended a small seminar on economics and gave a speech saying that the exchange rate might eventually reach 5. There was an awkward silence in the room after hearing my view; some even wore a look of disdain.
A friend told me after the seminar, “We all thought of you as a prudent economist, but your projection sounds groundless.” I explained to him that it was a conclusion based on analysis. He wasn’t convinced.
Since late 2021, people began to believe me, though dubiously, and few turned up their noses when I repeated that the exchange rate might reach 5 within a few years’ time.
Here is my logic.
From $10,000 to $20,000
Appreciation of a country’s currency often happens when its GDP rises fast.
According to the World Bank, a per capita GDP of $12,700 is what distinguishes between developed economies and underdeveloped economies today. This standard was set at about $10,000 one or two decades ago, indicating that the country achieving this goal is on its way to becoming a developed economy.
However, this status is changeable. In some economies, the per capita GDP slipped back to under $10,000 after reaching it. For example, Malaysia’s per capita crossed that threshold in 2011 but slipped back down to $9,800 in 2016; Brazil’s per capita GDP surpassed it in 2011 but decreased to $8,897 in 2019; Mexico’s per capita GDP hit the target in 2008 but dropped to $9,950 in 2019.
A per capita GDP of $20,000, which is the average level in developed countries, suggests that the economy achieving this has secured its position. Therefore, comparing the changes in some economies’ exchange rates to the U.S. dollar, which took place when their per capita GDP rose from $10,000 to $20,000, can provide a useful frame of reference.
After World War II, the countries and regions in Asia which achieved this growth in per capita GDP included Japan, South Korea, Hong Kong, Singapore and Taiwan.
Japan’s per capita GDP topped $10,000 in 1983 and reached $20,000 four years later in 1987.
South Korea’s per capita GDP topped $10,000 in 1994 but fell to less than $10,000 due to the 1997 Asian financial crisis. In 1999, it reached this level again; in 2006, it topped $20,000. This process lasted 12 years, if the year 1994 is considered the starting point, and seven years if the year 1999 is considered the starting point.
It took Singapore five years to raise its per capita GDP from $10,000 in 1989 to $20,000 in 1994.
The per capita GDP of Taiwan reached $10,000 in 1992, and it was not until 2011 that it increased to $20,000. The process took 19 years. The per capita GDP of Hong Kong rose from $10,000 in 1988 to $20,000 in 1993 during a short span of five years.
Except for Hong Kong and Taiwan, the per capita GDP growth from $10,000 to $20,000 in Japan, South Korea and Singapore came partly as a result of the appreciation of their respective currencies. The exchange rate of the Hong Kong dollar remained unchanged because Hong Kong adopts the Linked Exchange Rate System, and Taiwan’s currency depreciated by 25%.
The Japanese yen appreciated by a substantial 48% from 1983 to 1987 due to the “Plaza Accord” signed in 1985, though it had been appreciating before the signing of the accord. Since 1999, the South Korean won has appreciated by 27%, and the Singapore dollar by 27.5%.
Of the events that occurred in the past 40 years, the 1997 Asian financial crisis had the greatest impact on the Asian economy. This crisis, to some extent, was the negation of the economic model then adopted in Asia. The economic downturn, business failures and substantial currency devaluation during the crisis led market players to believe that the previous development model was obsolete. The economies which had been hit by the crisis adopted a new model and pattern when they entered a new stage of development. Therefore, the changes in the exchange rates, which took place while the per capita GDP approached $20,000, have a lot to tell us.
South Korea and Taiwan were the only two Asian economies which were affected by the crisis while raising their per capita GDP from $10,000 to $20,000.
The per capita GDP of Taiwan reached $10,000 in 1992 and $14,000 in 1997. After the financial crisis broke out, its per capita GDP did not fall below $10,000; the lowest level was $13,000 in 2001. It took Taiwan 10 years to raise its per capita GDP from $13,000 in 2001 to $20,000 in 2011. During this period, the New Taiwan dollar appreciated by 20%.
The stories of South Korea, Singapore and Taiwan shows that the exchange rate of the currency against the U.S. dollar can rise by about 25% to 27% when the per capita GDP increases from $10,000 to $20,000.
Where is China on this trajectory?
China’s per capita GDP reached $10,000 in 2020, and the exchange rate of the yuan against the U.S. dollar once dropped to as low as 7.2 after the August 2015 exchange rate reform and the onset of the China-U.S. trade war in early 2018.
If China’s economy continues to develop steadily and smoothly, the exchange rate of the Chinese yuan against the U.S. dollar will probably rise by 25% to 30% after China’s per capita GDP reaches $20,000. In other words, one U.S. dollar will be traded at the price of 5.4 to 5 Chinese yuan.
The data above indicate that 25% to 30% of the rise in per capita GDP from $10,000 to $20,000 is brought about by the appreciation of the home currency. As an economy that has reached the minimum standards set for a developed economy and is on its way to becoming a medium-developed one, the international market will accordingly have a higher valuation of it.
Singapore and Hong Kong are two small urban economies, with populations of over 5 million and 7 million, respectively. They are not directly comparable to the Chinese mainland.
So, who is more comparable? Japan, South Korea and Taiwan are a different story. All these economies have developed some or many large-scale and top-notch industries. People often associate these economies with the industries they engage in, such as Japan’s autos, home appliances, semiconductors and machinery manufacturing, South Korea’s autos, mobile phones, semiconductors and shipbuilding and Taiwan’s semiconductors and electronics industry.
Economies with a per capita GDP that hovers around $10,000 often lack prominent or world-class industries. Brazil, Mexico, Argentina and Malaysia, which fit in this category, lack impressive industries.
China is a huge country with a population of over 1.4 billion people. Considering its size, all its large-scale industries must be world-leading for its per capita GDP to top $20,000.
Ye Xiang is chief economist at Hong Kong-based brokerage firm Guoyuan Securities.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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Contact editor Joshua Dummer (joshuadummer@caixin.com)
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