The peg between the renminbi and the dollar is back in the spotlight this week, after Zhou Xiaochuan, the governor of the People’s Bank of China, that the link between the two currencies will one day end.
Zhou told a press conference that the peg was a “special measure” introduced to help China’s economy and that “these kinds of policies sooner or later will be withdrawn”.
This triggered speculation about when the peg might end, and the consensus among economists is that the renminbi will rise against the dollar this year by between 3% to 5%.
There are, however, some points to note. The first is that the governor of the People’s Bank of China has less control over the decision than you might expect. In the West, the heads of the central banks have a large say, indeed often the final say, over monetary policy.
But in China, Zhou wields less power than the head of the Commerce ministry, Chen Deming, who has suggested that it would take “two to three years” for Chinese exports to recover to pre-crisis levels. That suggests that the currency peg is not due to unwind in the short term. The same message is also coming from Wen Jiabao, the Chinese premier, and Zhou will also have to defer to the Finance Ministry before any decision is taken.
Meanwhile, Ben Simpfendorfer at RBS points out that export figures have been buoyant for the last two months partly because of the timing of Chinese New Year. The late holiday meant China’s factories had to rush to ship their goods early for the Easter holidays in the West, leading to a glut of exports in the first months of the year. Simpfendorfer points out that the same thing happened in 2007, when February’s exports surged by 52% y-o-y, only to fall back to 7% growth in March.
Finally, a closer look at what Zhou actually said gives away the fact that he himself is not expecting any imminent change. “We have to be extremely cautious in our timing,” he said, stressing that China’s economic recovery is not yet secure. It seems then, that the chances of a currency revaluation remain very low, but that Zhou has managed to take some pressure off Chinese policymakers by admitting that the peg will not last for ever.