renminbi

It’s as if the depegging never happened: the latest exchange rate set by China places the value of the yuan squarely within its original trading bounds.

On June 18, when the yuan was still pegged, it was trading at 6.8275 per dollar, with a 0.5 per cent tolerance each side (blue lines). Since then, the daily midpoint, published by foreign exchange regulator Safe, has generally valued the currency very slightly stronger than its original band. Not today. 

Another day, another hint from Chinese regulators about the future opening up of the country’s capital account. The latest statement from Safe today said that it was considering introducing new foreign exchange instruments, as well as containing a pledge to push forward with selective capital account reforms.

There was no information about what these new products might be – market participants say that FX options are likely to be the next new development.

The hints about new openings in the foreign exchange market are partly directed at an overseas audience where there are already grumblings about the slow pace of change in the exchange rate since the initial fanfare (see chart). As Mark Williams at Capital Economics pointed out today in a note entitled ‘Return of the Peg’, the renminbi barely moved at all against the US dollar during July. Indeed, “the renminbi has actually weakened in trade-weighted terms since the reform was announced”. 

“If [the central bank] had raised the value of renminbi in March and raised interest rates in April, financial markets would have been more stable.” This from Japanese media Asahi Shimbun, interviewing Zhou Qiren, a member of the Monetary Policy Committee, an advisory body to the People’s Bank of China.

The short interview transcript is well worth a read. Mr Qiren also points out one obvious consequence of a more flexible, or floating, currency: its value may fall as well as rise. If exports were to start suffering, the yuan would weaken to help the economy, Mr Qiren said. So far, the value of the yuan has strengthened almost imperceptibly: the blue lines on the chart are the tolerance levels for the original value of the yuan on 19 June. (h/t Market Watch)

Is the People’s Bank of China planning to further liberate the yuan? The central bank has cut the commitment to “keep the yuan’s exchange rate basically stable” from its latest currency communique. The rest of the message repeated the existing policy, i.e. to improve the currency’s exchange rate mechanism, and adjust its value with reference to a basket of foreign currencies.

Although the currency’s peg was loosened on June 19, the daily midpoint set by Safe has barely strayed out of the tolerance levels of the original peg; the currency need only have been 0.3 per cent weaker to meet the original, pegged criteria. Against the US claims of the yuan’s ‘true value’, the currency’s ‘strengthening’ is barely discernible.

James Politi

Finally, here is the Treasury report on international exchange rate policies.

Originally, the document had been scheduled to be released in mid-April, but it was delayed by the US government as it attempted to negotiate an appreciation in the renminbi while holding off mounting pressure to punish the Chinese from infuriated members of Congress.

As expected, the US is once again not naming China a currency “manipulator”, but only stating that its currency is “undervalued”. That outcome was a foregone conclusion since June 19, when China depegged from renminbi from the dollar, the first step towards appreciation.

In a statement yesterday, Tim Geithner, US treasury secretary, was cautious about the implications of the move. “What matters is how far and how fast the renminbi appreciates,” he said. 

Who needs context? “Yuan ends near post-revaluation high,” runs one of many excitable headlines.

Since the great unpegging, the yuan hit a ‘peak’ of 6.7801 on Wednesday. That’s a peak-to-trough movement of 0.69 per cent in the past nine days. For comparison, the dollar-sterling exchange rate peak-to-trough movement has been four times that, at 2.9 per cent. 

Today, for the first time, the midpoint set by Safe exceeded the 0.5 per cent tolerance bands set around the original exchange rate of 6.8275 – by half a basis point.

Not as historic as many expected at the start of the week. But then ‘flexibility’ does not mean ‘strength’: a flexible exchange rate can go up or down. Geoff Dyer, the FT’s China bureau chief, points out that domestic and international takes on the new policy differ greatly – principally because their desires differ greatly. Internationally, a stronger yuan is wanted. Domestically, the “export lobby is welcoming [flexibility] as a way of protecting itself from a weaker euro.”

China’s new policy has not completely ruled out the prospects of a political showdown. The obvious flashpoint is if the euro does weaken substantially again.

 

One of the big risks for the Chinese authorities in beginning to gently appreciate the currency is that they set up a one-way bet for investors who believe that the renminbi can only get stronger from now on. Large inflows of hot money could make it difficult to conduct monetary policy, officials fear, and might potentially aggravate inflation.

That explains why there has been much more talk since Saturday about volatility in renminbi trading and using a currency basket as a reference. When China abandoned its currency peg in 2005, it said the renminbi would trade against a currency basket of its main trading partners, but in reality it trailed the US dollar and was much less volatile than the 0.5 per cent daily trading bands allowed.

“In one area, the emphasis will be different this time,” says Li Daokui, a central bank advisor who believes the authorities will pay more attention now to the basket in which the euro plays a large role. Economists who have been briefed by the central bank say that there will also be more daily volatility, in order to keep speculators on their toes.

This means that in principle, says Mr Li, that if the euro gets much weaker, the renminbi could fall against the dollar. Richard Yetsenga at HSBC says something similar: 

Forward prices for the renminbi are surging even though there is no exchange rate shift yet from the People’s Bank of China, which announced on Saturday it would “enhance flexibility” of the exchange rate. In a defensive statement lacking detail, the Bank said it would:

“further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.”

But two things suggest this change will not prove as significant as it could be. First, the language. The statement talks of ‘furthering’ and ‘enhancing’ the current policy, rather than changing it. The only change word, ‘reform’, is used to refer to a continuing process.

Second, the defensive tone and text. “The basis for 

Alan Beattie

The travails of the euro and the US’s soft-pedalling on the renminbi having emptied Tim Geithner’s trip to China of much potential drama, the revaluation lobby back in Washington have tried a new tack. Charles Schumer, senator for Stronger Renminbi, and some of his colleagues have demanded that Beijing authorise the release of the staff report which forms part of China’s annual “Article 4″ IMF healthcheck for last year and includes the fund staff’s views on the exchange rate. More than 80 pc of IMF member countries publish staff reports, but China, as it is entitled to do, is not among them. It releases instead something at one remove, a rather more opaque summing up of the IMF executive board’s discussion of the report.

The IMF has been embroiled in these rows before, and for a while went so far as to refuse to discuss the Chinese economy in the executive board to avoid disputes. But it has also stated pretty clearly that it thinks the renminbi should be liberalised, and still not much has happened. While it’s good to have US senators pressing the cause of transparency within the IMF, with whatever motive, it’s pretty unlikely that what the fund thinks is going to tip the policy balance in Beijing.