Thursday, October 07, 2004

Just as quickly as the Chinese took renminbi revaluation off the table, they put it back on again. Or, at least, that's what the rumor mill in East Asia is churning out.
a Korean newspaper, citing Chinese sources . . . claimed the renminbi would be re-valued by 7 per cent by widening its trading band against the dollar sometime around October 15, in order to choke off inflationary pressures in China.
Of course, this is only days after the Deputy Governor of the People�s Bank of China said concerning the schedule for revaluation, "China has an 8,000-year history, a decade is truly a short period".

Andy Mukherjee at Bloomberg thinks a slow-and-steady Fed tightening policy, not to mention the bond market's expected end to tightening later this year, makes revaluation even less likely.
According to Desmond Supple, the Singapore-based head of Asian research at Barclays Capital Inc., a big part of the $93 billion rise in China's reserves this year is due to speculative inflows ``linked to an expectation of yuan revaluation.'' Foreign direct investment into China this year is only $44 billion, and the country has actually posted a $217 million trade deficit.

Unless the Fed raises interest rates quickly and significantly, China may be reluctant to tinker with its currency policy as "adjusting the peg would not be seen as a one-off move but rather the start of a process, and hence could exacerbate the problem of capital inflows," Supple says. . . .

Although China has managed to decelerate money supply growth for four straight months, inflation is still at a seven-year high of 5.3 percent. With fixed-asset investment expanding 30 percent in the first eight months of 2004, the risk of overheating hasn't fully abated in the $1.4 trillion economy that grew at a scorching 9.6 percent pace in the second quarter.

At such a crucial time, China may not want to lose its tenuous grip on monetary policy by opening its doors even slightly to what could snowball into a self-fulfilling prophecy of currency appreciation. . . .

"The Chinese view appears to be `if it ain't broke, why fix it?'" Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London, wrote in a report.

Finance Minister Jin Renqing and People's Bank of China Governor Zhou Xiaochuan may prefer to wait until inflation -- the cost of not doing anything -- becomes excessive.
The implication of course is that if China is successful at reigning in inflation through administrative measures (e.g. raising bank reserve requirements, using price controls, cancellation of government building projects), there may be no incentive for revaluation at all short of US tariff/quota threats.


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