After many days of strength, as of noon today the RMB declined by 0.15%, to 7.3949 to the dollar.Is this simply a random event or are the Chinese financial authorities warning European officials to stop pushing on the RMB front?
If it is the latter, it is likely to be a wasted warning.Domestic pressures in Europe are going to continue to grow, and I expect the European trade deficit with China to rise even further over the next few months. If we have more dollar weakness and a slowdown in the US economy, the European economy is going to have a real tough time adjusting, and already high unemployment is likely to rise.Anti-Chinese feelings are already high in Southern Europe, and are likely to spread, and even in Germany there is a bit of a chill in the relationship thanks to Chinese anger at Merkel’s meeting with the Dalai Lama.
At this rate it is hard to see how China will be able to avoid a nasty dispute with Europe over trade – a French engineer I spoke with last night brushed off the nuclear and Airbus deals that China recently signed with France, saying that Sarkozy should not bow to such transparent ruses.I wonder how many people in Europe see things in the same way.At any rate there is almost no one left, even in China, who does not think the RMB is not seriously undervalued. Fortunately there also seems to be a rising consensus in China that the RMB is not just a problem for China’s trading partners; it is an even worse problem for China.
Even though it makes sense for domestic reasons to adjust the currency more quickly, without serious foreign pressure I think Chinese authorities are still going to refuse, largely because of concerns about the possible adverse impact on domestic unemployment.I think they are making a huge mistake, however.China’s out-of-control monetary policy is already very likely to lead to domestic grief, and if we keep this pace of reserve accumulation up for another year, I think the chances of an ugly adjustment become extremely high.
Ironically, if US and European pressure is successful in forcing a currency move (trade sanctions would be disastrous for China’s export sector), it may still be too late to avoid a crisis anyway, only in this case the two countries would almost certainly be blamed for forcing the ensuing crisis onto China – in the same way the claim is often mistakenly made that the US “forced” Japan into the 1980s bubble.In both cases domestic monetary policy was the culprit, but foreign pressure will be blamed.
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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December, 2007
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