Select Page

On November 11, the People’s Bank of China, the country’s central bank, said that there might be a case for letting the renminbi appreciate against the U.S. dollar. China’s currency has been pegged to the U.S. dollar since July 2008 at roughly 6.83 renminbi to the dollar.

That’s given China’s exports a huge edge against Asian competitors. The cost to overseas customers of Chinese goods has fallen as the U.S. dollar has tumbled this year. With the currencies of competitors such as Korea and Japan rising against the dollar—and the renminbi—exports from those countries have become more expensive.

At the same time, the dollar peg has prevented any adjustment in the relative value of the dollar and the renminbi. That’s left the huge U.S. trade deficit with China as a festering sore in the relationship between the two countries.

It’s all too easy to pass off the People’s Bank comments as rhetorical window-dressing in advance of President Barrack Obama’s November 16 visit to Beijing. Especially since China’s commerce minister Chen Deming has recently gone out of his way to repeatedly praise the dollar-renminbi peg for bringing stability to a global economy in crisis.

But I think the issue isn’t if China will go back to a controlled float of its currency against the dollar but when. (From 2005 through July 2008 the renminbi appreciated about 20% against the U.S. dollar.)

The dollar-renminbi peg is simply too expensive for China for the government to maintain it indefinitely.

It’s a huge political problem in Asia for a country eager to assert its leadership in the region: It’s hard to get your neighbors to follow your lead when your exchange rate policies threaten to crash their economies.

By essentially subsidizing exports it further distorts a domestic economy that the Beijing government realizes is too heavy on heavy industry and manufacturing for export and too light on consumer spending

And a cheap renminbi encourages hot money to flow into the country. That requires the central bank either to spend down its reserves to prevent this tide of liquidity from creating asset bubbles or to impose rules that slow the economy across the board. It would be simpler to manage the Chinese economy for growth without having to contend with the effects of a flood of hot overseas capital.

So what’s the Chinese government and central bank waiting for? Solid evidence that China’s economy is back to delivering sustainable 8% plus annual growth.

You might think that recent numbers showing 16% growth in production and 16% growth in retail sales would be that evidence. Except that China’s economic leaders know as well as outside observers that Chinese economic data can’t be taken at face value. For example, in China retail sales numbers don’t track actual sales at stores but shipments to retailers. The goods counted as sold could still be sitting on retailers’ shelves. For more on China’s recnet economic numbers see my post http://jubakpicks.com/2009/11/11/chinas-economy-shifts-into-a-higher-gear/ )

My best guess is that China’s leaders want to see another quarter or more of domestic data to make sure that the apparent trend is real. And they want to see evidence that the U.S. economy is back in growth mode and that U.S. customers are back buying Chinese exports.

Until they see those numbers, they’re not likely to change a dollar-renminbi peg that supports exports.

That puts any real change off into early 2010. Delayed, yes, but still coming to a currency near you.