William Cline and John Williamson of the Peterson Institute have updated their estimates of ‘fundamental equilibrium exchange rates’: an exceptionally valuable cheat sheet for working out which currencies are over and under valued. (In fact they have not updated the FEERs, just their estimates of over and under valuation). Read more
Domestic inflation seems a much likelier explanation for the recent appreciation of the yuan than American pressure. Many commentators have referred to the Chinese “bowing to pressure” or otherwise implied that the authorities have – without apparent trigger – capitulated to Western pressure. A quick look at the timing suggests otherwise. China is in the middle of a tightening extravaganza, raising interest rates and reserve requirements to tackle inflation. A strengthening yuan can have exactly the same effect, by making imports cheaper. Timing is only circumstantial evidence, of course, but it is something.
Want to buy RUB/CNY directly? May soon be a possibility, the Russian central bank has told Chinese ambassador Li Hui. Xinhua reports a statement of intent from deputy head, Victor Melnikov, to the effect that Bank Rossii is willing to co-operate with China to effect a direct currency exchange between rouble and yuan.
Both countries are keen to deepen “financial co-ordination and mutual investment”, according to state-run media Xinhua. Dr Melnikov noted the economic and strategic significance of a direct exchange between the two currencies; the Chinese ambassador echoed these sentiments, and was keen to support Sino-Russian co-operation in economic, energy and science projects.
East Asian currencies are anything but stable viewed against the dollar: the Thai baht recently topped a 13-year high – and the yen and ringgit have both outpaced the baht’s rise so far this year. Viewed against each other, of course, these appreciating currencies are more stable.
New research challenges the habit of viewing all currencies against the dollar. It goes on to suggest that “considerable regional currency stability” can be achieved in east Asia if countries target the same basket of currencies as each other – even with no “explicit co-operation”.
China’s currency policy between mid-2006 and mid-2008 should be seen in this light, the paper argues; the simple view of the renminbi against the dollar does not explain the facts nearly as well. “The RMB behaved in this two-year period as if it were managed to appreciate gradually over time against its trade-weighted basket of currencies,” argue Guonan Ma and Robert N McCauley of BIS. Read more
Eight former US trade representatives and commerce secretaries pop up in the renminbi debate, warning Congress against legislating. No doubt timed to coincide with the deliberations on the Hill, with Ways and Means chairman Sander Levin having to decide which of the various options he wants to go with.
Easy to urge others to take a politically difficult route once you are out of office and don’t have to be re-elected, of course, but still might be an interesting contribution. The letter was distributed, btw, by the US-China Business Council, an association of multinationals active in China, which has been lobbying hard on the issue.
Somewhat as predicted, or at least predicted by me, Tim Geithner went as far as he could go in suggesting that various options were on the table for trying to push the Chinese into letting the exchange rate rise without giving any hostages to fortune.
The Murphy-Ryan bill (similar to Schumer-Graham in the Senate) got respectful attention and the possibility of support, though no commitment. Naming China as a currency manipulator, though, seems still to be off the table. Read more
Big day on the Hill on Thursday as Mr Secretary does the rounds talking about China: the Senate banking committee in the morning and the House of Reps ways and means committee (which spent yesterday on another auto da fe hearing about the Chinese currency) in the afternoon. He faces a Blondinesque balancing act of being mad enough at Chinese foreign exchange intervention to placate angry lawmakers while not committing to precipitous and possibly WTO-illegal action like agreeing to currency tariffs.
Last time he was in this position, on June 10, Geithner rather neatly managed to amplify the complaints of senators in the hope that they would be heard in Beijing without necessarily endorsing them. Nine days later, China unpegged the renminbi. He will most probably try some version of this again on Thursday and hope that puts enough pressure on Beijing to take its foot off the renminbi brake for a while. Would that placate the senators and the congressmen? No. (Appearing in front of congressional committees, Geithner somewhat resembles a put-upon nephew who has been deputed to break some bad news to a gang of irascible uncles.) But would it do enough to stop them forcing currency legislation on to a crowded fall legislative schedule? Probably, yes.
Whether prompted by inflation or politics, the yuan continues to strengthen, today at its highest level against the dollar since 1993. Seen in context, the strengthening is small – it’s the little squiggle on the far right of the chart, right. Compared to the currency’s ‘real’ value – according to the US – of USD1:RMB4-5, the shift is hard to spot.
But we have now seen five days of appreciation in a row, and the judicious appreciation of the Chinese currency makes good headlines, breaking records along the way. As Alan points out, it is likely to be just enough to deflect criticism at the G20. The chart below shows the daily midpoint set by Safe, the forex regulator, against the tolerance band of the original peg. Read more
Yowkers. Interesting timing for Japan to go back into the FX markets and sell the yen for the first time in six years. On Wednesday the US Congress cranks up its China currency campaign again, this time the House as well as the Senate coming up with a bill allowing the US to block Chinese imports on grounds of currency misalignment.
As I wrote before, it’s not clear which way this development cuts. Does it make it easier to confront China because another G7 country has been forced to deal with the effects of Chinese currency intervention, or does it make it harder to argue that China should stop intervening when Beijing can point at Tokyo and say “them too”? Read more
China will allow foreign central banks and overseas lenders to start investing in the country’s domestic interbank bond market for the first time, in a move aimed at encouraging internationalisation of the Chinese currency.
The People’s Bank of China, the central bank, said on Tuesday it had launched a pilot project to allow greater foreign access to its largely closed domestic interbank bond market in order to “encourage cross-border Rmb [renminbi] trade settlement” and “broaden investment channels for Rmb to flow back [to China]”. Read more