It looks like the fix is in.
The governments in Beijing and Washington look like they’re figured out a formula that will lead, sooner rather than later, to an end to the renminbi/dollar peg and the appreciation of China’s currency versus the dollar.
Sooner, I’d say, is this summer. Maybe as early as June. The twelve-month non-deliverable forward market in Hong Kong is pricing in a climb in the renminbi to 6.6346 to the dollar from the current peg at 6.8258.
The latest addition to the formula?
The postponement, announced by Treasury Secretary Tim Geithner on April 3, of the April 15 deadline for an annual review that might have wound up branding China as a “currency manipulator.” Needless to say that would have put a crimp in the April 12 visit of Chinese President Hu Jintao to Washington to attend a summit on nuclear security. U.S. President Barack Obama and Hu are expected to meet outside the summit to talk over bilateral issues such as China’s support for tougher sanctions on Iran and U.S. arms sales to Taiwan.
In the days before the Geithner announcement Chinese officials had indicated that the meeting could lead to productive discussions on issues of mutual interest if the U.S. was willing to recognize China’s special interest in Tibet and Taiwan. Those unnamed issues of mutual interest certainly included exchange rates. It’s by no means clear to me what kind of recognition China is looking for or that the U.S. is prepared to deliver.
The odds are that the Chinese will exploit the opening that the U.S. non-action on the currency manipulation review affords because it is increasingly to China’s advantage to end the peg. There are no signs that steps taken to date are working to slow growth in China’s economy. With some economists predicting better than 10% growth for China’s economy in the first quarter, fears that inflation will run out of control are growing in Beijing. It would certainly be easier to fight inflation and lower growth if a slightly more expensive renminbi lowered the price of imports for Chinese consumers and manufacturers and raised the price of China’s exports to overseas customers.
Ending the renminbi/dollar peg that has been in effect since July 2008 would also slow the flow of hot money into China from speculators betting on an appreciation of the renminbi.
The gradual 2% to 3% appreciation of the renminbi against the dollar that is all China is likely to permit in the first 12 months after ending the peg won’t have much actual real world effect on China’s exports or on imports into China. But an end to the peg could give a psychological boost to the shares of companies that compete with Chinese exporters and to shares of companies that sell in China. A stronger renminbi means that every renminbi-denominated sale in China translates into more dollars on the balance sheet for U.S.-based companies.
Ed-
I disagree, If it were Jim Cramer it’s body would be that of a chicken, and it would be set on a pedistal that contiually rotates in circles..
Gotta be somebody else…
DJ,
Nah. It’s Jim Cramer. 🙂
I assume the clay statue that is missing its head (On the far left) is Stern Hu ?
Mr Jubak-
Your intern deserves a gold star for the consistent delivery of first-class images at the start of each article.
“Sooner, rather then later”
I am betting on end of April – Mid to last week in May.
Chinese make only 1/6th to 1/7th of what Americans make. It’ll be a long time before U.S. and China reverse roles, if ever.
It looks to me like China is improving their internal economy quit quickly. There are reports of huge labor shortages again and a great portion of the new factory orders coming from within. If the reports are true then there is huge inflation pressure (wages are up 15% or so following the New Year holiday). This tells me that currency appreciation is in China’s best interest to help curb inflation. The dark side of me wonders if they’re just posturing on the issue to tick off Washington, and get some good laughs out of it.
So, U.S. and China will eventually reverse roles with U.S. providing cheap good to China to boost its own balance sheet? Is that only my wild thought?