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August 10, 2006
Will Nouriel Be Proven Right?
No, not about his contrarian view that the U.S. economy is about to go in the tank, but about his prediction that a major revaluation in the Chinese RMB is in the offing. As Brad Setser reported yesterday. "China's monthly trade surplus is still rising", and according to the Financial Times the People's Bank of China may have had about enough:
China’s central bank stoked expectations of further renminbi appreciation on Wednesday by saying the exchange rate could play a role in addressing international payments imbalances.
The statement, in the People’s Bank of China’s second quarter monetary report, came a day before China announced a record trade surplus for the third straight month in July, data that would add to the pressure on Beijing to adjust its currency...
The renminbi has risen just 1.66 per cent since Beijing’s 2.1 per cent revaluation last July, in spite of soaring trade surpluses and complaints from the US that the currency is undervalued.
However, the PBoC has recently permitted slightly greater daily volatility in the renminbi-dollar rate and allowed a series of record highs for the currency. This has fuelled predictions it will widen the current 0.3 per cent daily trading band and allow a more rapid appreciation..
It gave no details and the statement falls far short of a commitment to either appreciation or even significantly greater flexibility in the renminbi exchange rate – which the bank repeated should be kept “basically stable at a reasonable balanced level”.
But some analysts said the report supported the view that a consensus was forming among Beijing policymakers behind a stronger, more flexible currency.
How reliant the Bank will be on revaluation versus other policy options remains to be seen. From China Daily:
China will boost imports, loosen controls on outflows of capital and make the yuan more flexible to help curb a record trade surplus and slow the fastest economic growth in a decade, the central bank said...
But the bank said that China cannot rely solely on currency appreciation to balance its external payments.
"As part of a policy package, the exchange rate can play a certain role in adjusting the imbalance in international payments. But the fundamental way to resolve the international payment imbalance should come from expanding domestic demand and lowering the savings rate"...
We will use various monetary tools to reasonably control lending growth and prevent the economy from overheating," the central bank said. "We will speed up the implementation of the policy of boosting domestic spending and adjusting the economic structure to promote the balance of international payments."
The central bank said it will "adjust the bias in the management of foreign exchange which currently encourages foreign-exchange inflows and restricts outflows"...
The government will adjust preferential policies toward foreign companies, speed up the unification of domestic and foreign company corporate income tax rates and regulate policies by local government to attract foreign investment, the central bank said in Wednesday's report.
And from Xinhua Online:
China's central bank reiterated on Thursday the country's currency, the yuan, will remain "basically stable at a rational and balanced level".
The early move, according to the China Daily article, went in the "wrong" direction...
The yuan fell 0.08 percent to 7.9772 per dollar as of 3:30 p.m. in Shanghai.
... but it's early yet.
CORRECTION: I think I misread that last China Daily passage. The word "fell" here, I believe, applies to yuan needed to obtain one dollar -- so a decline in the exchange rate means that the dollar is depreciating against the Chinese currency. It has definitely depreciated since -- from Bloomberg:
The People's Bank of China fixed the reference rate for yuan trading at 7.9688 against the U.S. dollar today, compared with a close of 7.9772 yesterday on the interbank market, the strongest fixing since the currency was revalued in July 2005.
Now that makes more sense.
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