The widening of trading bands from 0.3% daily fluctuation against the dollar to 0.5% doesn’t necessarily make a lot of sense, in our opinion, since the renminbi has never once tested the old 0.3% limit since the original July 2005 revaluation; although the rate of renminbi strengthening against the dollar has picked up somewhat over the past few weeks, it’s still well below the pace we saw in the fourth quarter of last year, and so far the authorities have shown no inclination to make a sharp move to a true "basket" peg. In other words, there doesn’t seem to be any pressing need to widen the band … As a result, we suspect that the band widening is mostly a political gesture to the US on the eve of the Strategic Economic Dialogue, held next week in Washington D.C.
In our view, the proactive move on the currency front, which paves the way to faster RMB appreciation, is the most important, positive move. In combination with further widening of the Qualified Domestic Institutional Investor program, these latest policy moves are to help address the prominent macro policy concern of excess liquidity arising from sustained, elevated balance of payments surpluses. Looking ahead, we maintain our forecast that RMB appreciation will speed up further, with the RMB expected to reach 7.0 against the USD by the end of 2007. We continue to expect… another 27 base-point hike in both the lending and deposit rates later in the year, and look for another 50 base-point hike in the reserve ratio requirement.
Concerns about the overseas activities of China’s energy firms fall into three categories: such firms harm the energy security of others by taking oil off markets; they harm the economic interests of international oil companies by competing unfairly; and they hurt strategic interests by disrupting existing political and economic dynamics. The first contention we reject out of hand. Despite all the rhetoric about Chinese oil companies locking up resources through equity agreements, total international production by Chinese firms accounts for less than 2% of the global oil trade.
… The second point, that Chinese oil companies operate in a way Organization for Economic Cooperation and Development (OECD) countries have spent decades trying to stop, warrants more concern. State-related bank lending subsidies and government transfers at home lower the commercial criteria that China’s national oil companies must apply in operating overseas. … Though not very satisfying in the short term, the best option appears to be the one that the United States is already taking: to educate Beijing on the long-term merits of closing ranks to discipline overseas investment supports.
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