【09.11.17 金融时报】Will Beijing strengthen its currency?

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Will Beijing strengthen its currency?
http://edition.cnn.com/2009/BUSINESS/11/16/china.rmb.up.ft/index.html

By Peter Garnham The Financial Times November 17, 2009 -- Updated 0200 GMT (1000 HKT)


Pressure is building for Beijing to once again allow the value of its currency to rise.

As Barack Obama undertakes his first official visit to China, the fate of the renminbi is again in the spotlight of the international currency market.

Ever since the People's Bank of China changed the wording of a key currency policy statement last week, there has been speculation about whether and when the Chinese currency will be allowed to strengthen.

The wording change was significant because the Chinese authorities, which tightly manage the value of the renminbi, have kept the currency stable since the summer of last year. And the impact was immediate: in the past few days, forecasts for the appreciation of the renminbi against the dollar have risen to their highest level in a year, predicting a 3.4 per cent rise over the next 12 months.

The central bank's third-quarter monetary policy report omitted a phrase promising to keep the renminbi "basically stable" and added it would consider other major currencies, not just the dollar, in guiding the exchange rate of the renminbi.

China allowed a near-20 per cent appreciation of the renminbi between July 2005 and June 2008, but re-pegged to the dollar last year to protect its exporters as the financial crisis intensified.

China foreign exchange reservesMany, including the US, believe the renminbi's link to the falling dollar has left it acutely undervalued, giving China's export sector an unfair trade advantage.

The PBoC report has therefore led to intense speculation about a shift in currency policy to coincide with the US president's visit, ahead of which he pledged to raise the issue of exchange rates.

There have also been greater international calls for a stronger renminbi. The International Monetary Fund has been particularly vocal, but many other countries have joined the chorus, including some in Asia.

Dominique Strauss-Kahn, managing director of the IMF, said on Monday that exchange rate appreciation was part of the reforms that Beijing needed to implement to increase domestic consumption and move the country's economy away from a reliance on exports.

"A stronger currency is part of the package of necessary reforms," he said. "Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorientate investment."

Chinese economic data has improved following the huge stimulus programmes implemented over the past year. Recent figures have shown the country is on course to exceed its 8 per cent growth target in the fourth quarter, but they also show money supply growth hitting record levels, implying a build-up of inflationary pressures.

"The question is when will the action taken to date impact the economy to such an extent that the focus of economic policy in China shifts from supporting economic growth to tempering building inflationary pressures," says Derek Halpenny at Bank of Tokyo-Mitsubishi-UFJ.

He says Chinese money supply figures point to renewed inflationary pressures in 2010, which could lead the country to revert to the policy of gradual renminbi appreciation.

However, Mr Halpenny says such a policy might attract a new wave of capital into the country.

"One could argue that the policy of gradual appreciation actually encouraged speculative inflows that frustrated attempts to control domestic liquidity conditions," he says.

One option would be a large, one-off revaluation of the renminbi, which potentially could douse speculation over further rises and hence depress speculative inflows.

But few analysts predict such a bold step.

They say a renminbi revaluation at this stage could derail the fragile recovery that is developing not only in China, but also in the US.

Although China is on target to achieve its 8 per cent growth target, the composition of that growth is less encouraging. More than half of China's growth has been driven by the government's fiscal stimulus rather than private demand. A rebound in exports has also made a significant contribution.

"With the transition from a supply to a demand-driven economy likely to take some time with ongoing government support, it seems unlikely that China will be willing to put the contribution from exports at risk from a higher exchange rate at this time," says Hans Redeker at BNP Paribas.

Furthermore, he says, it currently makes little sense for the US to push for a higher renminbi given the potential negative impact on the US bond market resulting from any slowing in Chinese reserve accumulation.

China has built up foreign exchange reserves of $2,273bn. Much of this has been invested in US Treasuries, keeping a lid on US bond yields. Thus, any pause in Chinese reserve accumulation could lift yields and threaten any US economic recovery.

Bill O'Neill, Portfolio Strategist at Merrill Lynch Wealth Management, EMEA, says: "A turn in the dollar against the euro as a consequence of reduced Chinese reserve accumulation would have enormous repercussions for markets from commodities through to credit.

"We do not expect to see a move by China before year end, but merely the hint of a shift in currency policy could be enough to take some of the fuel out of the steamroller, forcing the dollar lower and cyclical assets higher."

One thing on which observers seem to agree is that there is unlikely to be any revaluation during Mr Obama's visit.

"We do not expect a major breakthrough," says Michael Hart at Citigroup. "China is loath to give in to foreign pressure."