China to Revalue Renminbi, Maybe

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We have not been the only commentators calling for the Chinese to revalue the Renminbi. Just about everyone outside of China has been saying either officially or unofficially that the Central Bank has to let the currency reach a more natural level if the trade imbalances are to be reduced and domestic consumption is to be maintained when the current artificial stimuli are phased out. But it caught many by surprise when the Central Bank last week said foreign exchange policy would in the future take into account, “capital flows and major currency movements, a pointed reference to the large speculative inflows of capital that China is receiving and of US dollar weakness according to the FT. The Renminbi has in effect been pegged against the dollar since July 2008 following three years of steady appreciation which saw it rise from 8.28 per US dollar to about 6.83. Since then as the dollar has weakened so has the RMB keeping China competitive in export markets but making it increasing difficult for other countries to sell into China, particularly the so called commodity currencies of Brazil, South Africa, Canada and China’s local raw material supplier, Australia.

The forthcoming APEC meeting of Pacific Rim leaders in Singapore has spurred several comments regarding trade flows and currency levels, most of them negative towards the Chinese position. The IMF said at the weekend that the Renminbi, which has in effect, been pegged to the dollar since the middle of last year, was “significantly undervalued. The US, the European Union and Japan have all stepped up pressure on China to allow its exchange rate to strengthen. So have the developing countries although some have been careful not to make their concerns known in public.

Even the IMF has said, “that will be a big help to the rest of the emerging market world from Brazil to Asia as China is such a big market. If other emerging market exports become more competitive in relation to China that will help them considerably. Privately, large parts of SE Asia have been saying the same to the Chinese but within the country there appears to be a divergence of views. Contrary to the Central Bank’s rather positive comments to the commerce minister Chen Deming who called at the weekend for a stable exchange rate to “create stable expectations for exporters, suggesting those responsible for trade are not so eager for a change.

In reality nothing is likely to happen before the middle of next year. The timing now probably has more to do with President Obama’s visit to SE Asia and heading off discussion on the subject. Nevertheless it is good news that the topic finally appears up for discussion and the Chinese should be encouraged at all levels to push the process through as soon as possible.

–Stuart Burns

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