China moved another step toward normal, according to economic data for November released on December 11. Not close enough to normal, yet, for China to remove the dollar peg that has kept the renminbi at 6.8 to the dollar since July 2008. But the statistics show that economic conditions in China are inching closer to the day when the Beijing government will decide to let its currency appreciate against the dollar again.
When that happens, you’ll be able to hear the sighs of relief from economies around the world, but especially in Asia, where companies are being forced to the wall because a cheap renminbi makes competing against Chinese exports just about impossible.
Normal will be good news for U.S. exports too since a rising renminbi will make U.S. goods cheaper in China as well.
Here’s the data that argues that China is headed toward normal.
First, exports continued to recover. Some economists were hoping that November would show a year to year gain in exports, putting an end to months of decline. (For more on the link between exports and a rising renminbi see my post http://jubakpicks.com/2009/12/10/when-will-chinas-currency-strart-to-climb-against-the-dollar/ ) That turned out to be optimistic, but the November 2009 drop was just 1.2% from November 2008. That was a huge improvement from the October year to year decline of 13.7%. On this trend China’s exports should start to show growth again in December or January.
Second, China’s official gage of consumer prices swung from deflation back to inflation in November. Consumer prices climbed by 0.6% in November 2009 from November 2008. In October prices showed a year over year decline of 0.5%. China’s equivalent to the U.S. producer price index (PPI), which measures price increases at the whole sale level, fell again in November, signaling that inflation hasn’t yet returned to prices at the wholesale level. But the drop in “prices at the factory gate” was just 2.1% year to year in November instead of the almost frightening 5.8% year to year decline in October.
All this adds up to an argument for removing the renminbi-dollar peg. If exports have recovered, Chinese companies would no longer need the extra boost they get from having an artificially weak currency, With the renminbi pegged to a falling dollar, Chinese exports get cheaper with every rise in the euro, won, baht, or yen. And if domestic inflation is starting to creep up, letting the renminbi appreciate is an easy way to fight the rise in prices. An appreciating renminbi would make imported commodities cheaper for Chinese manufacturers and also lower the prices of imported goods for Chinese consumers. That would have the added effect of increasing price competition for domestic Chinese consumer companies that might be thinking of raising prices.
The decision to let the renminbi go back to gradually appreciating—it climbed 21% against the dollar in the three years before the peg was restored in July 2008—will be made in Beijing based on China’s self-interest. But right now it looks like that self-interest will swing toward supporting a stronger renminbi in early 2010.