How things change, China FX manipulation edition | FT Alphaville

How things change, China FX manipulation edition

Mitt Romney, aspiring US president-to-be, has notoriously declared that if he ever takes office he will immediately name China a “currency manipulator”.

This, of course, is an ironic turn of events, given that China stopped being an outright currency manipulator a while ago.

Indeed, if any manipulation is now going on, it’s clearly on the appreciation side — since the renminbi is now depreciating much more quickly than China can stomach. (And no, Romney, that doesn’t count in your favour unless you are specific that it’s Chinese yuan appreciation that you are against.)

FT Alphaville is no longer alone in that view either.

Mark Williams and Qinwei Wang from Capital Economics make a very similar point about the renminbi’s recent weakness this Thursday.

The renminbi’s rise against the dollar stalled at the beginning of 2012 and the currency has fallen back in the last few weeks. The scale of depreciation to date is small – little more than 1% since early May – but this is the first sustained period of depreciation since the currency peg was loosened in 2005. What explains the shift? The renminbi’s weakness appears to stem from the actions of market participants rather than those of policymakers. The People’s Bank (PBC) still determines the level of the currency. It buys and sells foreign exchange and sets the central reference rate which fixes the band limiting how far the currency can move each day. But these moves recently have served to shore up the renminbi rather than prevent its appreciation.

We suggest that Romney’s advisors take particular note of the last sentence. See what they say there? The PBoC’s actions are now shoring up the renminbi not preventing its appreciation.

For further clarity there’s also this chart:

Pretty striking, no?

As the analysts go on (our emphasis):

In fact, the renminbi has weakened against the dollar during trading on every day since the trading band was widened to ±1% on 16th April. The cumulative impact has been muted only because the PBC has kept the daily reference rate roughly stable. (See Chart 1.)

This is not definitive proof that the market has soured on the renminbi, since the biggest seller of renminbi in the foreign exchange market historically was the PBC. But the PBC appears to have been a net buyer of renminbi last quarter (i.e. it sold foreign exchange), albeit of a measly $10bn in total (see our China Economics Update, “Lending set to fuel investment-led rebound in short-term”, 12th July).

In the interests of transparency, we should, however, point out that the analysts — unlike us –interpret this as a show of force by China.

They suggest, for example, that China wants to open itself up to two-way fluctuations so that the currency can gain reserve credibility. (Though in our opinion that doesn’t fully explain why they’d act to appreciate it at the same time.) Second the analysts suggest that a weaker currency serves China well at this juncture — since exports are slowing and inflation is falling. (Though yet again, why bother shoring it up at all if that is really the case?). And last, they suggest that had the PBoC wanted to, they could have stopped even the limited depreciation that the renminbi experienced last quarter (though they fail to mention this would potentially have involved the liquidation of US Treasury positions).

And in conclusion, they also noted (and we guess this one’s for Romney again):

But renminbi appreciation has not come to an end. Theory suggests that the currencies of economies experiencing rapid productivity growth should appreciate over the medium term. In trade-weighted terms, the renminbi is barely any stronger today than a decade ago.

So either way, the era of forced depreciation looks to be over.

Related links:
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China equilibrium *alert* – FT Alphaville
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