Renminbi keeps analysts guessing
By Peter Garnham in London and Robert Cookson in Hong Kong
Published: January 19 2010 18:31 | Last updated: January 19 2010 18:31
Few questions loom larger with currency strategists this year than whether, and to what extent, China will allow its currency to appreciate.
The country is under growing pressure from its international trading partners, led by the US, Europe and Japan, to let the renminbi rise. But so far it has shown little willingness to heed such calls.
On the contrary: last month, Wen Jiabao, China’s premier, said he would “absolutely not yield” to pressure for a stronger renminbi.
But the overwhelming consensus among analysts is that China is likely to abandon the renminbi’s de facto peg to the dollar as the world emerges from the financial crisis.
Indeed, over the last month, the futures market has moved from expecting a 1.7 per cent appreciation in the renminbi against the dollar over the next year to forecasting a rise of more than 3 per cent.
Adrian Foster at Rabobank says: “The combination of rising foreign exchange reserves and renewed growth in exports is likely to result in growing calls for China to revalue the renminbi.
“We expect the authorities to restart currency reform this year.”
After revaluing the renminbi by 2 per cent and depegging it from the dollar in mid-2005, China allowed its currency to appreciate by more than 20 per cent against the dollar until July 2008. Then the dollar peg was put into place as China sought to insulate its export sector from the financial crisis.
But China’s exports are rebounding again, with recent figures showing exports growing in December for the first time since October 2008. On an annual basis Chinese exports rose 17.7 per cent.
Analysts expect China’s economy to keep outperforming. When figures are revealed tomorrow, China’s economy is widely expected to have expanded at about 10 per cent on an annual basis in the fourth quarter.
The US and Europe have repeatedly called for China to let its exchange rate appreciate, while Japan has recently joined the chorus.
Naoto Kan, Japan’s finance minister, last week said he would address the issue of China’s currency at next month’s G7 meeting of finance ministers and central bankers.
Critics of China’s currency regime point to the country’s continuing accumulation of reserves as evidence that the renminbi is undervalued.
Data last week showed China’s forein exchange reserves, the world’s largest, rose by $127bn in the fourth quarter to $2,400bn.
To maintain its exchange rate, the People’s Bank of China takes the excess inflow of foreign funds from the market and channels it into its foreign exchange reserve account. To sterilise, or mop up, this liquidity, the bank issues central bank bills.
Rob Subbaraman at Nomura says this bill issuance has risen markedly since November.
He says: “The heightened monetary sterilisation operations suggest that appreciation pressure on the renminbi is intensifying.
“Interestingly, the decision to halt renminbi appreciation against the dollar in July 2008 coincided closely with decreasing sterilisation, so the recent pick-up could be a harbinger of a resumption of renminbi appreciation. We believe this could start around March.”
It is not just external pressure that could force China’s hand. Inflationary pressures are building in tandem with the country’s economic recovery.
The country has already started reducing monetary stimulus to offset these pressures by raising bill yields at recent auctions and announcing a 50 basis-point increase in the reserve requirements for commercial banks.
Analysts say that both policies are aimed at withdrawing liquidity and currency appreciation would be consistent with those moves.
Joyce Poon, China analyst at Gavekal research group, says a one-off 10 per cent revaluation would be the most logical way for China to control inflation, although that is unlikely to happen.
“China is a country that favours gradualism. So unless we see inflation going out of control, the chance of a one-off jump is relatively low.
“The appreciation of the renminbi is definitely going to happen, it’s just a question of how they’re going to do it.”
Patrick Bennett, foreign exchange strategist at Société Générale, concurs: “We continue to believe that effective policy must include a stronger renminbi and that there are strong arguments that can be delivered for a one-off move – potentially of 3-5 per cent.”
Most analysts believe China is more likely to implement a gradual appreciation, similar to that seen between mid-2005 and July 2008. Mr Foster expects the renminbi to rise by about 2 per cent against the dollar over the next year, modestly appreciating from the second quarter.
But, he believes, there are risks to that view, given the pressures China faces from its huge population.
Income is low with the average at $3,300 per person in 2008, about 10 per cent of the OECD average income level. Indeed, in many rural areas in China, the population is very large and extremely poor.
Mr Foster says that it would be understandable if China’s policy makers saw their strategic goals as aiding the move up the development ladder for as many of the population as possible.
He says: “While China’s leadership looks increasingly confident on the world stage, they face considerable challenges at home to bring the fruits of development to the broader population.
“A competitive currency is one element in the government’s policy tool kit and is likely to remain so.”
By Peter Garnham in London and Robert Cookson in Hong Kong
Published: January 19 2010 18:31 | Last updated: January 19 2010 18:31
Few questions loom larger with currency strategists this year than whether, and to what extent, China will allow its currency to appreciate.
The country is under growing pressure from its international trading partners, led by the US, Europe and Japan, to let the renminbi rise. But so far it has shown little willingness to heed such calls.
On the contrary: last month, Wen Jiabao, China’s premier, said he would “absolutely not yield” to pressure for a stronger renminbi.
But the overwhelming consensus among analysts is that China is likely to abandon the renminbi’s de facto peg to the dollar as the world emerges from the financial crisis.
Indeed, over the last month, the futures market has moved from expecting a 1.7 per cent appreciation in the renminbi against the dollar over the next year to forecasting a rise of more than 3 per cent.
Adrian Foster at Rabobank says: “The combination of rising foreign exchange reserves and renewed growth in exports is likely to result in growing calls for China to revalue the renminbi.
“We expect the authorities to restart currency reform this year.”
After revaluing the renminbi by 2 per cent and depegging it from the dollar in mid-2005, China allowed its currency to appreciate by more than 20 per cent against the dollar until July 2008. Then the dollar peg was put into place as China sought to insulate its export sector from the financial crisis.
But China’s exports are rebounding again, with recent figures showing exports growing in December for the first time since October 2008. On an annual basis Chinese exports rose 17.7 per cent.
Analysts expect China’s economy to keep outperforming. When figures are revealed tomorrow, China’s economy is widely expected to have expanded at about 10 per cent on an annual basis in the fourth quarter.
The US and Europe have repeatedly called for China to let its exchange rate appreciate, while Japan has recently joined the chorus.
Naoto Kan, Japan’s finance minister, last week said he would address the issue of China’s currency at next month’s G7 meeting of finance ministers and central bankers.
Critics of China’s currency regime point to the country’s continuing accumulation of reserves as evidence that the renminbi is undervalued.
Data last week showed China’s forein exchange reserves, the world’s largest, rose by $127bn in the fourth quarter to $2,400bn.
To maintain its exchange rate, the People’s Bank of China takes the excess inflow of foreign funds from the market and channels it into its foreign exchange reserve account. To sterilise, or mop up, this liquidity, the bank issues central bank bills.
Rob Subbaraman at Nomura says this bill issuance has risen markedly since November.
He says: “The heightened monetary sterilisation operations suggest that appreciation pressure on the renminbi is intensifying.
“Interestingly, the decision to halt renminbi appreciation against the dollar in July 2008 coincided closely with decreasing sterilisation, so the recent pick-up could be a harbinger of a resumption of renminbi appreciation. We believe this could start around March.”
It is not just external pressure that could force China’s hand. Inflationary pressures are building in tandem with the country’s economic recovery.
The country has already started reducing monetary stimulus to offset these pressures by raising bill yields at recent auctions and announcing a 50 basis-point increase in the reserve requirements for commercial banks.
Analysts say that both policies are aimed at withdrawing liquidity and currency appreciation would be consistent with those moves.
Joyce Poon, China analyst at Gavekal research group, says a one-off 10 per cent revaluation would be the most logical way for China to control inflation, although that is unlikely to happen.
“China is a country that favours gradualism. So unless we see inflation going out of control, the chance of a one-off jump is relatively low.
“The appreciation of the renminbi is definitely going to happen, it’s just a question of how they’re going to do it.”
Patrick Bennett, foreign exchange strategist at Société Générale, concurs: “We continue to believe that effective policy must include a stronger renminbi and that there are strong arguments that can be delivered for a one-off move – potentially of 3-5 per cent.”
Most analysts believe China is more likely to implement a gradual appreciation, similar to that seen between mid-2005 and July 2008. Mr Foster expects the renminbi to rise by about 2 per cent against the dollar over the next year, modestly appreciating from the second quarter.
But, he believes, there are risks to that view, given the pressures China faces from its huge population.
Income is low with the average at $3,300 per person in 2008, about 10 per cent of the OECD average income level. Indeed, in many rural areas in China, the population is very large and extremely poor.
Mr Foster says that it would be understandable if China’s policy makers saw their strategic goals as aiding the move up the development ladder for as many of the population as possible.
He says: “While China’s leadership looks increasingly confident on the world stage, they face considerable challenges at home to bring the fruits of development to the broader population.
“A competitive currency is one element in the government’s policy tool kit and is likely to remain so.”