Renminbi ruminations | FT Alphaville

Renminbi ruminations

Some critics are doubtful about the significance of Beijing’s moves but the volumes devoted to China’s weekend statement on currency flexibility on Monday morning would suggest otherwise.

As the FT reports, the Chinese central bank said in a statement on Saturday night that it would increase the flexibility of the exchange rate, effectively abandoning its currency peg with the US dollar via a policy of gradual appreciation of the renminbi against the greenback after nearly two years when the rate has remained unchanged.

Lex notes that “a teenager ordered to tidy its room will often do the minimum necessary to get the oppressor off its back.” So it is with China’s announcement that its currency will trade more flexibly against the US dollar, “three days after the US president told it to”. The move, a week before the G20 convenes in Toronto, allows five days of modest gains for Beijing to demonstrate it is a “responsible, if reluctant, world citizen”.

The real question, in Lex’s view, is, “what the truculent teen can hope to extract from the US in return — assuming the subsequent exchange rate movements are deemed to be sufficiently deserving”.

The FT’s editorial team meanwhile says China is heading in the right direction on its currency — not least because it “lowers the prospects of a trade war”. But, it reminds us, Beijing conducts exchange-rate policy “in its own interests, not in those of US politicians, baby-kissing or otherwise“. It is right to take a gradualist approach. But its own interests do require it to nudge along the process of global rebalancing. In the second half of this year, China may once again run up big surpluses that are, in the long run, unsustainable. A stronger currency would be good for China by raising the purchasing power of workers and fighting inflation.

It concludes that, slowly but surely, Beijing should allow the renminbi to find a market-determined equilibrium. Anything short of that won’t satisfy Washington. Nor will it, in the long run, be in China’s best interests either.

The FT’s Beijing bureau chief Geoff Dyer, meanwhile, says in an analysis that the greater “flexibility” that the central bank announced could potentially also include occasional periods of depreciation against the dollar. The Chinese authorities are aware of the risk of setting up a “one-way bet” on the currency that ends up attracting capital inflows into the economy.

By stressing that the renminbi will be managed against a basket of currencies, authorities have an excuse to weaken the currency against the dollar and punish speculators if the euro continues to depreciate, Dyer notes.

Just as before Saturday’s announcement, therefore, “China’s currency policy will depend heavily on what happens in Europe over the coming months. The central bank, which has been battling to strengthen the renminbi for some time to cool the economy and give it more control over monetary policy, has won a tactical victory over pro-export lobbies”.

If the situation in Europe stabilises, concludes Dyer, China’s central bank could yet secure the political backing to resume a more decisive path of appreciation against the dollar. “But until then, analysts say, its hands are likely to remain tied, despite the powerful political punch of its weekend announcement”.

According to the Wall Street Journal’s editorial comment, the best that can be said for China’s weekend decision is that it may avert a trade war. What no one should believe, it cautions, is that China’s move will “rebalance” the world economy or send manufacturing jobs rushing back to America.

BreakingViews, meanwhile, says that what we’re seeing is “mostly a return to China’s pre-crisis regime” and is unlikely to presage big changes in the renminbi’s short-term trading.

The BBC’s Stephanie Flanders also warns against big expectations. A rising renminbi won’t get rid of China’s structural excess of savings over investment — so, by extension, “it won’t get rid of its massive current account surplus with the US”, she says. In addition, as far as the Chinese are concerned, the weakening euro has already pushed up the trade-weighted value of the yuan significantly.

Flanders continues:

“The rise against the dollar in the months ahead may be slower than many Congressmen would like. Thanks to the recession, China’s current account surplus has gone from 11.3% of GDP in 2007 to 5.8% in 2007. The country even had a trade deficit at the start of this year, for the first time since 2004. The question is what happens next.”

Related links:
What is a basically stable renminbi? – FT Alphaville
Cuckoo clocks and chopsticks at dawn – FT Alphaville