Rise of the RMB

Sooner or later… but when?

Did China’s central bank governor suggest a stronger renminbi is on the way? Or was he merely misunderstood?

Sooner or later… but when?

A change of heart?

Not the way the Chinese press reported it. Wen Jiabao’s speech last Friday, in which he said that the renminbi would remain “basically stable”, got most of the attention. And if there was any nuance intended in comments from Zhou Xiaochuan, governor of the central bank, that current policy was a “special measure” and would change “sooner or later”, few in the local media chose to pick up on it.

In fact Commerce Minister Chen Deming got more coverage for his comments that currency stability was good as it had helped China’s economy during the global credit crunch.

At the beginning of the week, the Western media was more inclined to speculate on what Zhou meant by saying policy change would happen “sooner or later”. But even if the Financial Times was glimpsing a “crack in China’s monolithic resistance to strengthening its undervalued currency,” others noted that Zhou had stressed the need to be “very cautious” about revaluing and that it could take three years for global export markets to recover. All in all, there were grounds to interpret Zhou’s words very differently, says Tom Holland at the South China Morning Post.

Is the exchange rate debate a distraction?

Yes it is, the Chinese press agrees. China’s relatively low costs in manufacturing compared to the high production costs in the US account for most of the trade gap between the two countries, assured the China Daily.

The People’s Daily was more chiding, wheeling out seven academics to make the point that the US needed to look closer to home. It wasn’t an under-valued yuan that led to the economic crisis but financial mismanagement in Washington itself.

John Gong, professor of economics at the University of International Business and Economics in Beijing, offered a more measured opinion in the Shanghai Daily. But he also pointed to the three years before 2008, in which the yuan appreciated by about 20% and China actually saw huge growth in exports.

One problem, says the FT, is that China’s leaders want to avoid any impression of being seen to cave into foreign pressure, even if they agree that the renminbi should rise. Therefore Zhou’s hints are significant after all, as they lay the political ground for appreciation to start again at a future point.

The issue continues to engage US politicians, reports the Associated Press. A bipartisan group of American senators again urged Commerce Secretary Gary Locke in late February to investigate whether Beijing improperly helps Chinese companies by holding down the yuan. They claim it is undervalued by up to 40%.

What happens next?

Expect renminbi appreciation of around 3% in the first half of the year, says Chinastakes.com. April might be a good time politically, after the National People’s Congress but before the Shanghai World Expo opens. Plus it’s shortly before officials from China and the US government meet under the Strategic and Economic Dialogue in Beijing in May.

Bloomberg was reporting on Monday that the median estimate in a survey of 20 economists was for a 5% increase in the value of the renminbi to 6.50 against the dollar by March 31 next year. HSBC was a little more bullish, expecting the renminbi to move away from the peg as early as the second quarter, and reach 6.50 by the end of this year.

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