EconoChina

A blog on Chinese economy & society

China to preempt G20 by unpegging

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The PBoC’s announcement on increasing the RMB’s flexibility, supposedly due to its strong recovery, is sending all the talking heads, well, talking. How significant is this? Not much, I think, in the short to medium term. This is mostly a bid to deflate political pressure ahead of the upcoming G20 meetings. Those who bet on one-off large appreciation are going to be sorely disappointed. Even Timmy admitted that “the test is how far and how fast they let the currency appreciate.”Analysts are expecting about 2% appreciating by year end at the most.

What’s the impact on US trade deficits and government debt? If the appreciation is small, which I think it will be, the impact will be marginal on both US deficits and long yields.

But is this a complete non-event? Not true either. The key is that China’s new currency scheme is based on a “basket of currencies” rather than solely the USD. Given China’s over-sized allocation to the dollar in its reserves, presumably it will rebalance by increasing the share of other currencies. So potentially China could sell down USD assets to pay for this (or simply buy less in its future purchases of US government bonds), especially if the depreciation of the euro starts to bite Chinese trade.

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Written by Cindy Luk

June 20, 2010 at 1:41 am

Posted in China, Macro

Tagged with , , ,

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