What a carry-on.
Hank Paulson is back in China for another US-Sino “strategic economic dialogue” - top mission, as ever, the pursuit of a stronger renminbi. But, it’s not all hunky dory. Analysts galore have been discussing the possibility China may in fact be making a U-turn on its US-approved path of renminbi appreciation.
The latest analyst to change his tune on this topic is no less than currency guru Stephen Jen of Morgan Stanley. In a note earlier this week he wrote:
Bottom line: I am changing my call on the CNY: I now believe that Beijing could very well permit modest and temporary (5-10%) depreciation of the CNY. That Beijing would hold the line on the USD/CNY parity was too demanding a call, given the economic reality China faces. A flexible CNY will help validate the depreciating trend in AXJ. Until now, I have had the view that, despite the intense pressures from the slowing economy, the rapidly rising manufacturing unemployment, and the sharp rate cuts,China will most likely resist devaluing the RMB.
Although Jen concludes he’s not saying there will be maxi-devalution, rather a renewed flexibility in the renminbi exchange rate allowing for some modest weakness in the weeks ahead.
Standard Chartered’s view is similar. Even though the USD/CNY spot market keeps moving up or beyond the upper end of the daily trading band, they say the NDF market (non-deliverable forwards) is wrong to be rallying as strongly as it is on the depreciation view. It’s the trade weighted value that counts and that is still at a high, suggesting policy hasn’t u-turned all that forcefully. From Thursday’s StanChart note:
There is a theory being put out in the market that there is a desire to weaken the Chinese yuan (CNY) now so that there can be some appreciation after President-elect Barack Obama moves into the Oval Office on 20 January. The fact is that by our estimates the CNY real effective exchange rate (REER) reached a 20-year high in October and so even some modest weakness now against the USD is still consistent with a trade-weighted appreciation policy. The move may also be some reaction to pressure to help exporters. This move will also help to remove some of the market‟s „one-way bet‟ mentality. We had been expecting some modest CNY weakness in H1-09. The 1M, 3M and 1Y NDFs are currently indicated at 6.9725, 7.1150 and 7.3350 mid.
That’s all very well, but comments by central bank Governor Zhou Xiaochuan Thursday suggest China is prepared to do whatever it takes to avoid the “worst case scenario”. Above all, that could mean doing anything possible to beef up exports irrespective of what the US or Europe says. In that case Henry Paulson’s job in China may well be a challenging one.
Perhaps to convince them Paulson should put forward Brad Setser’s point. The CFR blogger says the renminbi’s position against the currency basket is actually more important than against the dollar anyway. In that respect:
China followed the dollar down against the euro in particular from 2002 to 2005. The renminbi’s huge depreciation against the euro — and a tightening of Chinese macroeconomic policy to try to avoid over-heating — contributed to the surge in China’s current account surplus from 2004 on. Even after China moved away from a strict dollar peg, it never quite allowed the renminbi to move enough against the basket to generate a meaningful real appreciation. Renminbi appreciation against the dollar wasn’t fast enough to overcome the dollar’s large slide at that time. In real terms, the renminbi hardly moved — and almost all the appreciation came from the rise in inflation, not a nominal appreciation of the renminbi against a basket of currencies.
This means China is only now seeing the real appreciation it should have back when the dollar was weaker. Furthermore, China should not be relying on exports to soothe its slowdown anyway. If government policy is focused on defending export market share, efforts to rebalance the world economy will be set back. Setser says this will not be good for anyone. Rebalancing the system away from a situation where Asian economies permanently rely on the US and Europe to make-up for their own shortfalls of domestic demand is what is called for. And what that means, says Setser, is:
… that China ultimately needs to accept an uncomfortable real appreciation of the renminbi.
Related links:
Renminbi stops crawling - Lex
Could China be depreciating? - FT Alphaville
John Authers: The short view - FT.com
