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If not now, Wen? Still no signs that China is planning a quick appreciation of its currency agains the dollar
03/08/2010 2:31 pm EST
So while it’s significant that anyone in the Chinese government is making noises about China abandoning the renminbi/U.S. dollar peg that’s been in effect since July 2008, it’s just as important to note that the statement came from the governor of the People’s Bank of China and not from Chinese premier Wen Jiabao.
In a March 6 press conference Zhou, the head of China’s central bank, called the policy of keeping the Chinese currency pegged at 6.83 to the dollar a special policy aimed at helping China weather the global economic crisis. By pegging the renminbi to the dollar Chinese exports gained a price advantage over competitors as the dollar dropped in value during the crisis.
That certainly implies that Beijing will drop the peg once the global crisis is over.
In contrast Wen did not bring up the renminbi/dollar peg in his state of China speech to the National People’s Congress on March 5. The premier’s most recent comments came in December when he said only that “We will not yield to any pressure of any form forcing us to appreciate.”
There’s a brief window after the National People’s Congress ends and before China’s president Hu Jintao visits Washington in April for China to end the peg without seeming to make the move in response to U.S. pressure. The consensus among economists and China watchers, though, is that mid-2010 is more likely.
Global politics aside, China has increasingly good reasons to end the peg.
As the dollar rises against the against the euro, pegging China’s currency to the dollar costs China exports to Europe and makes China’s imports from Europe more expensive. The renminbi-dollar peg also depresses Chinese incomes and domestic consumer demand (since a cheaper renminbi buys less) at a time when Beijing wants to increase domestic incomes and consumption. And an undervalued renminbi has added to the flood of foreign cash into China making the job of fighting inflation and controlling speculation even tougher.
Judging by how China moved in 2005 when it allowed a controlled renminbi float, the betting is on a quick but small 2% appreciation of the renminbi followed by a very controlled move upwards totaling about 3% to 5% in 2010.
Anything faster though would push hundreds of margin Chinese manufacturers into the red.
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