Jim ‘the BRIC’ O’Neill’s big call | FT Alphaville

Jim ‘the BRIC’ O’Neill’s big call

He’s no stranger to headline-grabbing pronouncements and just to prove it, Goldman Sachs chief economist Jim ‘the BRIC’ O’Neill is back with a verrry big call on Monday, telling Bloomberg that “something’s brewing” in China on the currency front.

In remarks that are guaranteed to send some investors into a frenzy (and splatter egg over O’Neill if no action from Beijing follows) he reckons China is about to let its currency strengthen as much as 5 per cent in a one-off revaluation to slow growth.

The renminbi would then trade  in a wider band or against a larger basket of currencies – which would, in turn, greatly help to counter international pressure on Beijing over its refusal to allow the currency to strengthen, he reasons.

Referring to an order from China’s central bank last Friday for commercial banks to set aside larger reserves, O’Neill observes:

“I have a strong opinion that they’re close to moving the exchange rate… Something’s brewing. It could happen anytime.

Indeed, Beijing’s order to the commercial banks – amid other moves to restrain credit growth – rattled global markets at the end of a turbulent week. As the FT reported on Friday:

For a second time in a month, China ordered commercial banks to increase the reserves they hold, sparking fears among investors that the global recovery could stall because of a slowdown in the world’s fastest growing economy.

Economists said China’s move was an effort to control rapid lending rather than significantly tighten monetary policy. But some investors interpreted the increase in reserve requirements as a move to restrain lending that would slow economic growth.

It’s not as if further steps by Beijing to curb bank lending would come as any surprise, having been a feature of regulatory pronouncements since December. But few – as O’Neill well knows – would foresee a hefty currency appreciation of as much as 5 per cent. As Bloomberg noted:

China’s yuan recorded its biggest weekly decline in more than a year last week on speculation importers bought dollars before this week’s Chinese New Year holidays. Vice Commerce Minister Zhong Shan said on Feb. 8 the government may allow the yuan to move in a “small range,” while stressing the official stance is to maintain stability in the currency.

The yuan depreciated 0.09 percent last week to 6.8330 per dollar, the biggest loss since the five days ended Jan. 9, 2009. The reserve requirement will rise 50bp or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said. The current level is 16 percent for the biggest banks and 14 percent for smaller ones.

Economists in China have said that Friday’s order to increase reserve requirements was not part of Beijing’ push to curb bank lending. As the FT explains, the central bank always injects substantial liquidity into the country’s financial market ahead of the Chinese lunar new year holiday, which began on Saturday, and when demand for cash is high. The higher reserve requirements, which kick in after the break, are one way to withdraw that liquidity.

Nevertheless, financial markets have been unnerved by Beijing’s latest steps to rein in new lending including, in mid-January, orders to several banks to suspend new lending until the end of the month.

As Bloomberg adds:

Chinese policy makers are seeking to restrain credit growth,  after the economy grew the fastest since 2007 in the fourth quarter. Banks extended 19 per cent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January as property prices climbed the most in 21 months.

Amid international accusations that China has kept its currency undervalued to help exporters, Beijing has resisted allowing gains in the renminbi since mid-2008, after the currency strengthened 21 per cent against the dollar in the previous three years.

A 5 per cent hike in the renminbi’s value would not only address those concerns but would help slow the economy and tackle inflation fears, says O’Neill, who reckons China’s economy is currently growing between 12 and 14 per cent. His estimates for growth this year, at 11.4 per cent, are significantly above the World Bank’s 9 per cent estimate.

As O’Neill told Bloomberg:

“The more they do — and the sooner — the better.”

Related links:
China: ‘It’s simply because people are rich now’
– FTAlphaville
The story of the Brics –FT
And now for a Chinese real estate crash? – FT Alphaville
China: First the banks, now the corporates – FT Alphaville