China: Immediate One-off Appreciation Almost Impossible
by world@nextvietnam on 20/02/2010
No immediate one-off appreciation – Some observers are again speculating on a one-off gapping appreciation in the CNY in the very near term. We believe that such a move is very unlikely in the coming month, even though many of the economic rationales are sound. We stick to our view that CNY revaluation could happen in the later part of Q2.
No negative surprises ahead of the NPC – China will hold its annual National People’s Congress mid-March. This is an opportunity for local officials to have a national audience. Often times, policies that are desirable to most firms and local authorities are introduced just ahead of these meetings, such as expanding consumer support, controlling property speculation, and fighting corruption. Gapping appreciation would immediately put a lot of pressure on businesses and generate negative comments, especially from the trade heavy provinces that are also major contributors of jobs and tax revenues.
US-China tensions preclude immediate action – President Obama met with the Dalai Lama yesterday. It often takes a few months to cool off tensions between China and the US. RMB revaluation is unlikely to occur in such an adverse external environment.
Currency revaluation is determined by top policy-makers in China – So nobody can possibly know when the appreciation will actually occur. If the US authorities expected major change near term, they would have kept political confrontations lower profile.
Seasonal volatilities could economic outlook – All economic indicators tend to be volatile until the first quarter is over. We think CPI could jump to over 3% in Feb, as a result. But this is well expected given the holiday shift. So, unless CPI far exceeds that level, an earlier revaluation is not necessary.
China’s growth momentum is slowing down – Inflation momentum is strong, but growth (especially QoQ) momentum is not showing an overheating economy, especially when lending is being tightly controlled. Exports are the only strengthening sector, and will suffer after a one-off appreciation
No consensus on the magnitude of undervaluation – The purpose of a one-off appreciation is to reduce expectations for further appreciation and the incentives for hot money inflows. But there is no reliable consensus, even among US policymakers and external observers, as to how much that revaluation needs to be.
No more than July 2005 – Even if a decision was made for an one-off move, it would unlikely be much bigger than the 2% move in July 2005, since policymakers do not expect the export boom to return. A new FX regime, such as a currency basket, is possible, but may take even longer time to implement. And the result would still likely be a dollar heavy mix.
(By Citi Research, 19 Feb 2010)
by world@nextvietnam on 20/02/2010
No immediate one-off appreciation – Some observers are again speculating on a one-off gapping appreciation in the CNY in the very near term. We believe that such a move is very unlikely in the coming month, even though many of the economic rationales are sound. We stick to our view that CNY revaluation could happen in the later part of Q2.
No negative surprises ahead of the NPC – China will hold its annual National People’s Congress mid-March. This is an opportunity for local officials to have a national audience. Often times, policies that are desirable to most firms and local authorities are introduced just ahead of these meetings, such as expanding consumer support, controlling property speculation, and fighting corruption. Gapping appreciation would immediately put a lot of pressure on businesses and generate negative comments, especially from the trade heavy provinces that are also major contributors of jobs and tax revenues.
US-China tensions preclude immediate action – President Obama met with the Dalai Lama yesterday. It often takes a few months to cool off tensions between China and the US. RMB revaluation is unlikely to occur in such an adverse external environment.
Currency revaluation is determined by top policy-makers in China – So nobody can possibly know when the appreciation will actually occur. If the US authorities expected major change near term, they would have kept political confrontations lower profile.
Seasonal volatilities could economic outlook – All economic indicators tend to be volatile until the first quarter is over. We think CPI could jump to over 3% in Feb, as a result. But this is well expected given the holiday shift. So, unless CPI far exceeds that level, an earlier revaluation is not necessary.
China’s growth momentum is slowing down – Inflation momentum is strong, but growth (especially QoQ) momentum is not showing an overheating economy, especially when lending is being tightly controlled. Exports are the only strengthening sector, and will suffer after a one-off appreciation
No consensus on the magnitude of undervaluation – The purpose of a one-off appreciation is to reduce expectations for further appreciation and the incentives for hot money inflows. But there is no reliable consensus, even among US policymakers and external observers, as to how much that revaluation needs to be.
No more than July 2005 – Even if a decision was made for an one-off move, it would unlikely be much bigger than the 2% move in July 2005, since policymakers do not expect the export boom to return. A new FX regime, such as a currency basket, is possible, but may take even longer time to implement. And the result would still likely be a dollar heavy mix.
(By Citi Research, 19 Feb 2010)