Recent currency market fluctuations, combined with a consensus dollar overvaluation is leading many commentators to frantically search for a currency which might have the possibility of supporting a sustained rise. Clearly this is not the case with the Yen, since almost all proposals for tackling Japanese deflation are accompanied with a recommendation to drop the Yen. At present the Euro is rising steadily, but those famous 'fundamentals' seem to offer little support for this with Germany on the point of a double-dip recession, and with the distinct possibility of following Japan into a deflation trap. Hence the 'experts' are searching frantically for an alternative, and according to this piece from the Financial Times they may have found a candidate: China. There are rumours that there will be a move a the next G7 meeting to begin to pressure China to come off the dollar peg. If this is true it is not a well-advised proposal. China is still economically in its infancy, is carrying much of the load of world economic growth, and is suffering its own deflation and internal dislocation following the restructuring of the state sector. Any proposal to raise the Chinese Yuan would be a result of economic weaknesss elsewhere, not strength from China, not yet. The solution to US, Japanese and European growth problems does not revolve around making life more difficult for the one part of the world economy that is actually working. As I said, not yet anyway.
Speculation has been mounting in recent days that the G7 meeting scheduled for the end of the month will urge China to allow an appreciation of the renminbi. Japan, in particular, has long claimed that China is exporting deflation. On the surface, the rumours look credible. The US is now running a larger trade deficit with China than with Japan - $9.5bn compared with $6.5bn in October. The People's Bank of China has estimated that 75 per cent of manufactured goods produced by China are in oversupply, leading to a build-up of inventories. But, according to Marc Chandler, chief currency strategist at HSBC in New York, there is unlikely to be any new developments on the renminbi at the next G7 meeting.
"It is simply that the G7 members do not tend to spend much time with issues over which they have little power," he said. "And it will be almost impossible to persuade China of the wisdom of revaluing its currency." Although official Chinese growth rates were generally treated with scepticism by analysts, he said, there was no denying that the economy had flourished under the fixed rate. A revaluation would reduce China's competitive edge, aiding its regional rival Japan. In addition, a more flexible currency regime would demand a relaxation of restrictions on capital flows. This, said Mr Chandler, would also threaten the position of Chinese companies by forcing them to compete more actively for funds from domestic investors. "Some think that bad debts are around 30 per cent of GDP, which may be even worse than the problem in Japan," he said. "Relaxing capital controls would be exposing Chinese companies to competition before they are ready." By cutting import prices, an appreciation of the renminbi would also exacerbate China's own deflation - which has been running at between 1 and 2 per cent during the past three years."The stable renminbi is in China's interests," Mr Chandler said.
Source: Financial Times