When Chinese President Hu Jintao visits the United States next week, he will face renewed pressure to quicken the hitherto lethargic pace of the renminbi’s appreciation against the US dollar.
But if American policymakers feel aggrieved at Beijing’s lack of movement on the currency front, they should spare a thought for China’s other major trading partners. It is a little noted fact that since being de-pegged from the dollar in June 2010, the renminbi has actually fallen on a trade weighted basis (see chart after the break). Sharp declines against the euro and the yen have more than offset the currency’s small gains against the dollar.
According to JP Morgan, the trade weighted value of the renminbi fell 2.4 per cent from June 2010 to the end of the year. As the chart illustrates, the currency depreciated for five consecutive months after de-pegging, before staging a modest recovery to reach its September levels by the new year.
This is largely accounted for by the renminbi’s losses against the euro and the yen, the currencies of two of China’s biggest trading partners. As of last Friday, the renminbi had dropped 1.8 per cent against the euro and 5.2 per cent against the yen. It had increased 3 per cent against the dollar.
How far these trends reflect Chinese intervention in currency markets is unclear. Thanks to its reputation as a safe haven currency – not to mention Chinese purchases of Japanese government bonds – the yen has been strengthening against most currencies since the global financial crisis began.
Conversely, the trade weighted dollar has been steadily declining since investors caught wind of the Federal Reserve’s decision to expand its programme of asset purchases to push down long-term interest rates.
Yet the fact that the renminbi has fallen against the euro suggests that intervention must have been significant: the euro has taken a hammering in most currency markets over the past year due to fears related to the European sovereign debt crisis. It is perhaps no coincidence that the European Union is China’s biggest export market.
Whatever the causes of the renminbi’s weakness, however, it undoubtedly represents a significant subsidy for Chinese exporters to European and Japanese markets.
The debate about the renminbi’s exchange rate has essentially been a bickering match between China and the United States. But on the latest evidence, it is Europe and Japan – and not the US – that should be shouting the loudest.