It is difficult to know where the politics stops and the policy begins with regard to China’s currency. A US election is brewing and this could see a rise in anti-China rhetoric – the country is said to keep the renminbi at an artificially low rate against the US dollar in order to ensure its exports are competitively priced – as candidates woo voters who by then may be facing an economic slowdown.
However, going on past history, there is no guarantee that US complaints will deliver a significant appreciation in the renminbi.
“Domestic considerations will always come first in China,” said Qu Hongbin, chief China economist at HSBC.
But there are now signs that a faster rate of appreciation is exactly what the domestic economy needs. Since the one-off revaluation of 2.1% in July 2005, the renminbi had appreciated 11% against the US dollar by the end of December 2007. According to Citi, this represents a gain of just 0.75% in real terms. The renminbi has also fallen in value against the euro and most Asian currencies.
This slow progress on the exchange rate – combined with direct and indirect assistance from the government for producers – has kept costs and prices low, fueling a trade surplus that was expected to pass US$250 billion in 2007. The sea of money flowing into the country due to external surpluses is driving up asset prices and creating inflationary pressure.
“They need to move the currency as it’s becoming a problem for them,” said Jonathan Anderson, chief Asia economist for investment bank UBS. “It’s a real pain for monetary policy that for the last four years it’s been nothing but a rising trade surplus and capital inflows.”
There is talk of another one-off revaluation but Anderson believes there will simply be faster appreciation. He expects there to be 6.8 renminbi to the dollar come the end of 2008, down from 7.4 in mid-December. JPMorgan says 6.3 and Citi group 7.08.
HSBC’s Qu and Dr Nicholas Lardy, a senior fellow and China specialist at the Peterson Institute for International Economics in Washington, predicting a more cautious approach. “My feeling is that the Chinese are quite worried about a US slowdown,” said Lardy. “This will all contribute to the view that this is not a good time to appreciate the renminbi at any great rate.”
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