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July 15, 2005

Is Remninbi Revaluation Imminent?

According to the Financial Times, the Bush administration is saying "yes".

The Bush administration has told key senators that it expects China to revalue its currency in August ahead of a planned visit to Washington by President Hu Jintao in September, according to people familiar with the matter.

Senators Charles Schumer and Lindsey Graham, co-sponsors of a bill that would impose a 27.5 per cent tariff on Chinese imports, agreed to delay a vote on their bill after receiving what they regarded as an assurance that China will move on its currency next month...

“Senator Graham and I believe that the administration is convinced that China will begin a revaluation process this summer, forced by our bill's success in the Senate,” Mr Schumer told the FT...

China is considering introducing a currency regime similar to the managed float operated by Singapore. Under this system the renminbi would be pegged to a basket of currencies reflecting the country's trade, but the details of the weights of the basket would not be made public, a person familiar with the Chinese administration's thinking said.

If this story is true, we may finally get our much anticipated natural experiment on whether the policies of the Chinese central bank have been responsible for low long-term interest rates in the United States.

The debate over the renminbi will be fuelled, in China as well as in the US, by news that the country's foreign exchange reserves increased by more than $100bn in the first six months of this year to $711bn.

China's foreign reserves are on track to break $1,000bn by June next year if it continues to expand at the present rate.


Nouriel Roubini is not surprised.

Kash guesses the adjustment will fall in the range of " 10%, not much, a very slight rise, and almost none. "

Brad DeLong is filled with wonder:

China is a $2 trillion economy. That rate of reserve accumulation means that 10% of China's total income is being spent buying reserve assets--the overwhelming bulk of them dollar-denominated.

That is amazing...

UPDATE II: The New Economist says "don't expect [revaluation] to solve the massive US-China trade deficit."  Brad Setser contributes his usual excellent analysis and adds "I think DeLong somewhat overestimates the chances (four in five?) of avoiding a crisis of some sort, though I agree with his assessment that the odds of a crisis are rising."


July 15, 2005 in Asia , Exchange Rates and the Dollar | Permalink


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Listed below are links to blogs that reference Is Remninbi Revaluation Imminent? :

» FT: China to revalue in August from New Economist
As China's foreign exchange reserves reach US$711 billion, the Financial Times r [Read More]

Tracked on Jul 15, 2005 3:10:36 PM

» China Will First Invest And Then Revalue from The Prudent Investor
Following the discussions on Brad Setser's and Brad DeLong's blogs about an imminent Yuan revaluation I am astounded that nearly everybody assumes the China export dragon will fly forever and even accelerate on that way while using all cash receipts ... [Read More]

Tracked on Jul 18, 2005 11:39:37 PM


First time I hear of someone annoucing the date of a move and the direction of a move. Or is it someone trying to provoke massive upwards speculation ?

Posted by: 4degreesnorth | July 15, 2005 at 09:32 AM

"...we may finally get our much anticipated natural experiment on whether the policies of the Chinese central bank have been responsible for low long-term interest rates in the United States."

Here's the only prediction that makes sense:

Interest rates will remain completely unaffected by any net selling of foreign-owned securities, no matter how massive the sell-off might be.

Liberal economists have got to stop blindly accepting the old Classical Theory assumption that the SUPPLY of loanable funds that become available in the credit markets ALL comes from aggregate savings. It does not.

"There is no limit to the amount of money The Fed can inject into the loanable funds market. If savers were to suddenly pull most of their money out of banks and put it under their mattresses instead (equivalent to a dramatic reduction in savings), The Fed would still be able to easily maintain the supply of loanable funds or even increase it by simply buying every sort of debt instrument offered in the credit markets. Even if The Fed bought up all of the nation’s debt---something that would never happen---and there was still a shortage of loanable funds, it could maintain/increase the money supply by buying buildings or land or anything else it fancies."

"Whenever The Fed buys securities in the open market, it pays for them with money that it creates out of thin air with a keystroke. It does not draw the money from some reserve account that is limited in size.* It is “new money” that did not exist prior to the keystroke that created it. With any of its purchases of securities, The Fed provides loanable funds to banks THAT WERE NOT SAVED BY ANY SAVER."

See why the question of what happens to US interest rates if the Chinese become net sellers of US securities is actually kind of silly? If the Fed buys the same number/denomination of securities from commercial banks that the Chinese are selling, the money supply remains unchanged.

The Fed is the only determinant of money supply that matters.

Posted by: James Kroeger | July 15, 2005 at 02:59 PM

It would make more sense for a CHINA reval to take place while the USD is rallying. A stronger USD has hopefully given the Asian CBs the ability to diversify their holdings into other forms of currency (ie. Gold, Oil, Companies...). This has been indicated by 2 months of weak TIC data. The FED cutting off the carrytrade was just the BID they needed to complete this task. If the US economy does slow Asian CBs might repatriate to subsidize their export led economies until they become internally sufficient to continue on their growth track. This would cause the higher LT yields. If the US FED tries to expand M2 to further pad the economic weakness this would just be another reason for Foreign CBs to pull the plug. Further weakness in the USD is almost a given. It would make more sense to invest in a country where the savings rates are high and growth is sustainable. The argument about US productivity is loosing steam everyday. US corporations have transferred this miracle overseas. It has been duplicated. Mean US wages are roughly 45k compared to 1k for most of Emerging Asia. A narrowing of the differential should take place. In the US debts are high. Demand is surely closer to being saturated than our Asian friends. Diversification is key to going forward. I would not be surprised of any outcome in the ST. But, the LT.....I would be betting with Asia.

Posted by: BE | July 17, 2005 at 08:37 PM

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