Rise of the RMB

A more flexible note

A lot of ink was spilled over China’s announcement last Saturday that it has broken its 23 month-old peg to the dollar

A big weekend for the forex markets?

Last Friday the China Daily ran the headline: “US wrong to blame China for own woes: fresh criticism of yuan off the mark”. State media has long argued that renminbi appreciation wasn’t likely, particularly after the Greek debt crisis sparked a slowdown in Europe. But just a day after China Daily’s defiant headline hit newstands, the Chinese authorities were pledging a more “flexible” currency. The weekend announcement came as a surprise. But the timing seems deliberate. The China Economic Times noted the announcement was made on the “eve of the G20 summit in Canada this week”.

The announcement got blanket coverage in the international press. “The decision to drop the two year-old informal peg to the US dollar was cheered by the US and other trading partners,” reported the Wall Street Journal, which thought it was prompted by “heavy pressure” from the US and other economies. This made the move “as much a political call as an economic one”, and would prevent the yuan becoming the central topic of discussion at the G20, and potentially embarrassing the Chinese leadership.

So China has finally capitulated to US demands?

The Chinese media was given a clear line by the propaganda chiefs: keep to the technical details and avoid any suggestion that the government had ‘caved in’ to foreign pressure.

Yes, the yuan strengthened to its highest ever level on Monday, reaching 6.79 to the dollar. But the Shanghai Business Daily noted enigmatically that the central bank “chose the right time to announce ‘further’ exchange rate reform, of which the underlying intent is certainly not a major policy change, but a return to the basic path of pre-crisis gradual progression towards a managed flexible exchange rate.” Sir Humphrey Appleby couldn’t have put it better.

The New York Times poured cold water on all the excitement, pointing out that yuan has not moved up by much. Wednesday’s rate actually weakened on the evening before, and was only “a touch stronger” than the level at which the currency has been hovering for the past two years.

HSBC economist Qu Hongbin reckoned that the new ‘flexibility’ meant that China would look at a basket of currencies rather than just the dollar – so if the euro fell, that could even mean the renminbi would depreciate versus the greenback.

Will it have a positive impact?

China Securities Journal thought that a flexible renminbi (i.e. an appreciating one) will ease inflationary pressures imported from abroad. Big winners include domestic airlines such as Air China, through lower fuel costs (oil being priced in dollars) and lower dollar debt (in local currency terms) on aircraft purchases. China Daily’s editorial thought that the policy switch would also see Chinese exporters forced up the value chain which could turn out to be “a boon in the longer term”.

Japan’s Nikkei doubts it: “A strong currency will cause a spike in unemployment, paving the way for social unrest, while moderately paced reform will not help reduce the nation’s dependence on exports and expand domestic demand.” That means a major appreciation isn’t on the cards: traders were betting that breaking the peg to the dollar would only lead to a 2.3% rise in the yuan over the coming year. “Few think the move will have a dramatic impact on the world economy,” forecast the Financial Times.


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