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Wednesday, July 02, 2003

Rinban Rising?

Hooray! For the first time in nearly three weeks I'm back in the world of connectivity, and at home. Of course, there is no sign of any explanation, or apology. Now, returning briefly to the last post, one of the clearer forcasts coming from the Malmberg model is the rapidly rising strategic economic importance of South and South East Asia. I couldn't agree more. (Malmberg seems to think that around 2015 could be an important watershed, I would even bring this number forward a bit, on the grounds that things are getting faster faster, but the difference may come down to a quibble). One of the mid-term consequences of this will be a relative currency revaluation, but I still think it is a little early to give a lot of importance to this. Clearly when the major Asian ex-Japan currencies are able to appreciate to a significant extent, and when their economies are able to support this appreciation due to the changing real worth of their economic activity, this will have especially important consequences for the US twin deficit. In fact, at present the only important currency 'correction' I see in the pipline is a reverse downward movement in the euro. This is not going to happen yet, but it is difficult to see how a low, or negative, growth eurozone can sustain and support, mid-term, the currency at its present value.

Meantime, pressure on the Chinese Rinban continues to mount, in particular due to the inward dollar flow. Changes in Chinese policy are undoubtedly in the pipeline, but I would be surprised if the cumulative effect were especially earth shattering. Chinese policy is unlikely to move far from the current dollar peg, and my feeling is that the Chinese, unlike some who it may be diplomatic not to mention, are in a position to try and get their way.

China is looking at ways to relieve pressure for the revaluation of the renminbi, as a prelude to adjusting the 10-year-old system that effectively pegs the currency to the US dollar, according to officials and academics. Such considerations have become more urgent recently as a rapid inflow of "hot money" has strained the central bank's ability to dictate monetary policy. Officials said the central bank had recently been forced to buy an average of $600m dollars a day to steady the exchange rate. The intervention helped to drive China's foreign currency reserves above $340bn by the end of June, up from $316bn at the end of March. This figure - which has not been officially announced - may reinforce the view that the renminbi is undervalued.

The renminbi's future is important in Asian countries, partly because any revaluation would be seen as a possible trigger for a round of currency appreciations throughout the region. The increase in reserves is due less to export competitiveness than to expectations by Chinese companies that the renminbi will appreciate. "They are bringing their funds back to China and changing them into renminbi in expectation of a revaluation," one official said.

Given such strains, the People's Bank of China (PBoC), the central bank, is considering ways of limiting the growth in foreign currency reserves - a policy departure for a government that has seen its large reserves as a symbol of national pride. One option under consideration would be to allow companies to keep a larger portion of their foreign-currency earnings, either within China or offshore. All but a fraction of such earnings must now be sold to the PBoC, adding to the reserves and boosting domestic money supply. Another option would be gradually to relax restrictions on Chinese people and companies wishing to buy foreign currency.

There are strict limits on how many - and for what purpose - US dollars can be bought by Chinese in exchange for renminbi. In addition, Chinese companies are to be encouraged to invest abroad, both directly and in financial markets. Domestic companies will be allowed to buy bonds in overseas markets and the authorities are considering allowing selected institutional investors to trade stocks in Hong Kong. There is no timetable for the adoption of any of the options under consideration, officials said, and timing may depend on whether revaluation pressure abates or intensifies. Only when the PBoC is comfortable that demand for renminbi and dollars is more closely aligned will it allow market forces greater play in determining the renminbi's value against the US dollar, the officials added.
Source: Financial Times

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