According to a Bloomberg article today, the RMB was up 0.56% last week, reaching 7.456 to the dollar.This may not sound like a lot if you trade dollar/euro, but it is easily the biggest one-week jump in the US dollar value of the currency since it was suddenly revalued by 2.1% in July, 2005.According to a Bloomberg article, RMB forward contracts imply a price of 7.38 by the end of this year and 7.25 by the end of the first quarter.The article did not list the contract expiration date or a more precise RMB value, so my calculations may be slightly off, but this implies a 6.4% annual appreciation between now and the end of the year and a 7.0% annual appreciation between now and the end of 2008’s first quarter.Implied annual appreciation during the first quarter of 2008 is 7.3%.
Two reasons are generally given for the increase in appreciation rate, and both probably are true.The first, and more cynical, reason is that there will be a meeting later this month between Chinese finance officials and their European counterparts, along with a meeting between France’s President Sarkozy and President Hu, and everyone expects the currency to be a very important topic of these meetings.As they often do before such discussions, the Chinese authorities may be allowing the currency to appreciate to help deflect some of the expected anger.One of the claims much beloved of journalists and China-watchers is that foreign pressure on Chinese authorities is almost always counterproductive, a claim about which I am extremely skeptical.
The second reason for the more rapid rise in the currency is that the inflation scare is ringing serious alarm bells in Zhongnanhai (the leadership compound), even while publicly the authorities still insist that inflation is a one-off temporary food thing.Given the anxiety, it is striking to me that fuel prices were raised by nearly 10% last week and that there are rumors that other controlled prices may also rise.This can’t help but feed into inflationary expectations.I think the only thing that can easily explain the timing of such rises must be that the costs of the subsidies must be higher than the authorities are willing to support, although perhaps there is also a sense that they should get all the bad news out of the way as quickly as possible.
If market assumptions are correct and the RMB does begin to appreciate at 7.3%, with bank deposits yielding 3.8% you can earn 11.4% in US dollars if you can smuggle money into China and deposit it in a bank.Even the most intrepid of my hedge fund friends in New York wouldn’t sniff at those kinds of returns, especially since the biggest risk is upside risk – a sudden maxi-revaluation.There’s the problem – an obvious danger of speeding up the appreciation rate is that it might set off another wave of speculative inflows, thus pushing monetary conditions even more out of whack.Poor PBoC – dammed if they do, damned if they don’t.
The way people sometimes describes things, you'd think that Hu Jintao reads the newspaper in the morning and immediately picks up the phone and immediate orders people around to do things. That's just not how things work in big organizations. Major policy changes take months of negotiation and bargaining to implement, since they usually involve a large amount of coordination between different agencies.
What most likely happened was that the Politburo decided to revalue the currency sharply in the summer, and the delay was to have the 17th party congress finish and everyone in their new places before doing anything. There are several major initatives going on right now QDII and CIC being two important ones, and all of these initiatives are interlinked and require quite a bit of coordination. In particular, I don't see how the government can push forward with a massive QDII program or the linkages between the Shanghai and Hong Kong stock markets without freeing up the currency. Also what ever inflows there are, they are likely to be dwarfed by the massive outflows that are coming in the QDII program and CIC's strategic investments.
As far as the price increases, the reason for those is that price controls just don't work and almost always makes the problem worse and Chinese officials realize this, so at the first sign that they were causing serious problems, the price controls were relaxed.
I would caution against drawing any conclusions from a couple weeks of market actions. Remember, for the most part of Oct., the spot hovered around 7.5100 levels, so the recent move can be seen as just catching-up of monthly downward move of 400pips. Of course, I am saying faster appreciation down the road is out of the question, but if authorities allow that, the consequence of that would be similar to making another one-off large revaluation: more speculative inflows.
By Joseph Xie - 11/3/2007 10:20 PM
"One of the claims much beloved of journalists and China-watchers is that foreign pressure on Chinese authorities is almost always counterproductive[.]"
I was originally going to post a comment saying I thought this was a but of a straw man, and that few people actually believed this any more. But I thought I would first try a little empirical research. I did a Google search using the terms "foreign pressure China counterproductive" and confess there really are a lot of people who say this. Still, I think that there are at the same time a substantial number of people who don't say it - for example, all the foreigners who are trying to put pressure on China to do things, presumably because they believe such pressure will be effective. (Of course, some politicians may be doing it simply for domestic votes and are indifferent to the actual effect.)
Whether "foreign pressure" works or not depends on the details. In particular, the PRC is unlikely to compromise on issues which it concerns issues of national sovereignty, but this limitation is usually not relevant to most economic issues. In several cases, foreign pressure consists of another interest group which participates in a dialogue that already exists in the Chinese government, and in that case foreign pressure can change policy. Three examples of this are banking regulation, ASAT tests, and Chinese policy in the Sudan.
In the case of RMB revaluation, most of the foreign pressure involves interest groups that really don't care much about RMB revaluation per se. Wall Street is not so much interesting in RMB revaluation than an open capital account. Textile producers don't really care much about RMB revaluation per se, but want trade protection on textiles. RMB revaluation becomes the uniting mantra, because Wall Street and textile producers don't agree about much else, but the pressure is self-limiting, since Wall Street does not want anything to happen that kills trade.
In both cases, screaming about RMB revaluation has gotten those interest groups a lot of what they wanted, by mechanisms other than RMB revaluation.
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Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (6) for "RMB appreciation is speeding...
- 11/3/2007 11:03 AM
October, 2007