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.
Every two weeks, on average. That’s how often China is introducing some form of tightening at the moment. The People’s Bank has just increased the reserve ratio again, by 50 basis points, or a half of one percentage point. This increases the amount of cash banks have to keep with the central bank, thus reducing the amount available to lend. Our calculations suggest rural and small-medium sized banks will have to keep 15.5 per cent of their deposits with the central bank, while larger banks will need to keep 19 per cent. In October of last year, PBoC introduced a further division between banks, increasing the reserve requirements of the six largest banks temporarily, keeping the ratio of other large financial institutions on hold. If that division has now expired, the ratio for the six largest banks is now also 19 per cent. The move will be effective January 20.
Mopping up liquidity in this way is one tool to combat inflation. Another is to let one’s currency appreciate. Signals have been sent today from a senior central bank official that China will allow further flexibility in the yuan. “Flexibility” is a one-way bet in the markets at the moment, and the State Administration of Foreign Exchange today set the central parity rate of the yuan at 6.5896 against the dollar, a new record.
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.
The People’s Bank of China repeated its commitment to increasing its currency flexibility on Wednesday, the day before the US votes on a bill that would allow American companies to ask for tariffs on Chinese imports to compensate for a perceived undervaluation of the yuan.
From Business Week: Read more
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
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
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
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
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. Read more
“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.
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. Read more
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: Read more
China’s central bank has spoken of measuring the yuan “with reference to a currency basket”. One of the bank’s academic advisers, Xia Bin, said the change in language suggests a change to the dollar peg, reports Business Week. An economist at Morgan Stanley interpreted the shift in the wording of the report as significant, and yuan forward prices have been rising for the past two days on speculation of a rise in the currency.
Reining in property speculation is not enough to combat inflation. An advisor to the Chinese central bank has said there is a fundamental problem with the PBoC mandate.
Zhou Qiren said there was “conflict” between the bank’s forex intervention and its job to manage liquidity and control inflation, reports Bloomberg. Speaking of the record levels of lending in 2009, he said: “Unless there are very forceful measures, that large amount of money will flow through the market. Even if you put lid on in one place, it will emerge somewhere else.” Read more
Growing evidence suggests a stronger yuan would not help the US economy nearly as much as thought, if at all. Even increased Chinese consumption is shown not to help much. So why do these assumptions continue to underpin politicians’ rhetoric?
First, the evidence:
- Yuan revaluation could cut global growth by 1.5 per cent (April 26)
- Chinese saving less and spending more would have very little impact on US jobs (April 25)
- A 15 per cent appreciation of the RMB would reduce the American trade deficit by 5 per cent by the end of next year, but would be short-lived and would not flow through to GDP (April 16);
- “Chinese revaluation is in the interests of China, not the US” (April 16)
- “People seem to ascribe a ridiculously outsized role to China’s currency policy in producing China’s trade surplus and America’s trade deficit. The level of rhetoric is simply not consistent with the impact of the peg.” (March 15)
Even large changes in Chinese currency or consumption have little effect on the other side of the Pacific: US-China trade is simply too small to transmit much of the effect, so the arguments run.
So, second, why the continued assumption Read more
We generally call it the renminbi round here, but yuan gives a better headline. Just come out of a briefing from the UK’s Alistair Darling, taking a break from the general election campaign (for those taking notes, he’s got a majority of 7,242, not the safest seat in the world but not a marginal).
Darling had just stepped out of the IMF ministerial committee meeting in which, he informed us when I asked him, the words “yuan” and “renminbi” were never uttered. Apparently they discussed global economic imbalancing in somewhat broader terms. And the 800-pound panda in the corner of the room went ignored.