EconoChina

A blog on Chinese economy & society

When is China going to truly revaluate?

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As if to underscore the term “flexibility”, the RMB/USD exchange rate rose AND fell, in an apparent bid to deter speculators. Does this mean that the new regime is new in name only? That the RMB will not appreciate at all? I don’t think so. But I think the rate of appreciation will be modest (i.e. 2-3% by YE), as in the tradition of Chinese policy, and fall way short of what the Schumers of the world demand. But then, since when is Chinese policy driven by anything other than domestic considerations?

Why do I think that the RMB will truly revaluate? ’cause the timing is right. In its bid to free itself from dollar bondage, China will need to have a floating, freely-exchangeable currency eventually. With inflation running amok and the euro dropping like a stone, going dirty-peg now requires minimum real appreciation, as the RMB has already appreciated in real trade-weighted terms. This is a way to soften the punch of reform.

Because of capital control, all financial institutions have to deposit their foreign currencies deposits with the PBoC, which in turn deposit them with SAFE, one of China’s reserve managers. The flow and amount of these deposits is a proxy for hot money inflow. These foreign deposits, which rose sharply in H2/2009 to about USD300bn per month, dropped significantly in May, perhaps due to concern over China’s policy tightening. So China is essentially under the least speculative pressure to appreciate in months. Score two for softening the punch.

When is this going to happen? It’s been reported that some Taiwanese companies have converted most of their dollar holdings into RMB as they have been warned by their Chinese bankers that revaluation will come within a couple of months. This is a good enough take for me.

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Written by Cindy Luk

June 23, 2010 at 2:54 am

Posted in China, Macro

Tagged with , , , ,

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