EconoChina

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Posts Tagged ‘appreciation

Is RMB revaluation imminent?

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The rumor mill has gone on a overdrive with speculation that the RMB is going to appreciate in the short term. Timmy’s surprise visit to Beijing is cited as a hint. After all, why would he make the trip if not to ask for more? Simply widening RMB’s trading band is seen as not enough to appease this time around.

There may be some truth in this reasoning, but one has to ask is China likely to agree? Even if they do decide to appreciate, how likely is that they will do it now? Bear in mind they’re due reporting the first trade deficit in 6 years, the Sino-US Stretegic & Economic Dialogue is coming up in May and US elections in November. Currency war is NOT going away, and they do have millions of jobs on the stake. Giving it all at the first request simply is not good negotiating technique.

All three members of the freshly minted members of the Monetary Policy Committee of the PBoC have given interviews lately. While they favor a more flexible exchange rate mechanism, they see the RMB to appreciate by 5% within the year at the most. Another adviser to China’s powerful planning commission predicts just 3% appreciation this year. Goh Chok Tong, the Senior Minister of Singapore and the chairman of its central bank comments publicly on the BoAo Forum (the Asian version of Davos for the non-initiated) today that it’s time for China to adopt a more flexible exchange rate mechanism. But the points to take home are the caveats:

The problem that the RMB is facing is not simply appreciation, of real importance is to change the existing exchange rate mechanism. The mechanism to peg tightly to the USD will hurt Chinese economy.

Now a small, paternalistic (some might even argue authoritarian) nation like Singapore doesn’t usually butt in the affairs of China. But there’s talk that China’s new mechanism will bring more currencies to the peg basket, a la Singapore.

So I stick to my earlier assessment that widening of the trading band is all Timmy’s going to show for his efforts this time around. An appreciation of 3%-5% may come anytime between May and November when the political heat from Washington becomes truly unbearable.

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Written by Cindy Luk

April 9, 2010 at 6:51 pm