Renminbi drop sparks speculation that Beijing is to focus on growth

tauringhuang.

By Peter Garnham

Wednesday, July 30, 2008
  
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Stability
is what the Chinese authorities crave as the nation prepares for the Beijing Olympics. But to the chagrin of many of its trading partners, the stabilisation of the Chinese renminbi is most unwelcome.

China's currency has appreciated markedly since it was de-pegged from the dollar in July 2005, rising nearly 18 per cent against the greenback.

Moreover, the renminbi's rate of appreciation has accelerated this year, rising over 8 per cent since January, as China sought to use the currency – along with higher interest rates and the tightening of reserve requirements of the country's commercial banks – to keep a lid on rising inflationary pressures.

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But there has been a slowdown in the renminbi's appreciation this month, with the currency rising just 0.2 per cent against the dollar, way below this year's monthly average of a rise of above 1 per cent.

Indeed, on Monday the renminbi, which is still tightly managed by the Chinese authorities, recorded its largest single one-day fall since China cut the renminbi's ties with the dollar three years ago.

This has sparked speculation that Beijing has moved away from using the currency as a tool to counter inflationary pressures to using it as an instrument to promote growth.

Any switch from allowing the renminbi to trundle higher will disappoint those nations that have long complained the Chinese currency remains severely undervalued and provides an uncompetitive advantage in relation to trade.

Comments from China's Politburo appeared to signal such a shift last week.

The concluding statement of its meeting on Friday emphasised the importance of maintaining stable growth and did not refer to previous concerns about overheating in the economy.

Following this – and adding to the speculation – a statement issued by the People's Bank of China on Sunday made no mention of the “tight monetary policy” that has been standard in its communications for the past few months.

Simon Derrick at Bank of New York Mellon says the speculation of a shift in policy has some merit given the developments on China's stock markets.

The Shanghai Composite Index has lost 53 per cent since peaking last October and has fallen more than 45 per cent so far this year.

“China will start to focus more on growth rather than inflation this year,” he says. “Allowing the currency to stabilise would seem to make some sense.”

Mr Derrick says the multiple raising of reserve requirements and appreciation of the renminbi are making themselves felt, with the latest figures showing inflationary pressures are declining somewhat in China.

Carl Weinberg at High Frequency Economics says Chinese consumer price inflation, which hit multiyear highs this year, is set to fall in July.

“Traders and politicians will like seeing a drop in perceived inflation,” he says. “This will take the pressure off the central bank to hammer monetary conditions higher.”

However, not all analysts are convinced that China's authorities are set to abandon their tight monetary policy and allow the renminbi stabilise.

Mark Williams at Capital Economics says the inflationary threat in China has undoubtedly diminished in recent months and it would be strange if the government did not acknowledge this.

But, he adds, even if the balance had shifted slightly towards promoting growth, tackling inflation still seems to be the Chinese authorities' primary concern.

“Officials have used a change in rhetoric to acknowledge concerns that inflation-reduction policies such as currency appreciation are hurting many firms at a time when the outlook for external demand is uncertain and domestic demand is easing,” Mr Williams says.

“But they have fallen short of committing to adjust those policies.”

By the time the last firework fizzles out at next month's Olympics closing ceremony, the Chinese authorities will be in a better position to assess the state of global demand.

It may not just be the games, but the renminbi's three-year rally that is declared over.

tauringhuang.

Simon Derrick at Bank of New York Mellon says the speculation of a shift in policy has some merit given the developments on China's stock markets.

The Shanghai Composite Index has lost 53 per cent since peaking last October and has fallen more than 45 per cent so far this year.

“China will start to focus more on growth rather than inflation this year,” he says. “Allowing the currency to stabilise would seem to make some sense

tauringhuang.

Mr Derrick says the multiple raising of reserve requirements and appreciation of the renminbi are making themselves felt, with the latest figures showing inflationary pressures are declining somewhat in China.

Carl Weinberg at High Frequency Economics says Chinese consumer price inflation, which hit multiyear highs this year, is set to fall in July.

“Traders and politicians will like seeing a drop in perceived inflation,” he says. “This will take the pressure off the central bank to hammer monetary conditions higher.”

However, not all analysts are convinced that China's authorities are set to abandon their tight monetary policy and allow the renminbi stabilise.

Mark Williams at Capital Economics says the inflationary threat in China has undoubtedly diminished in recent months and it would be strange if the government did not acknowledge this.

But, he adds, even if the balance had shifted slightly towards promoting growth, tackling inflation still seems to be the Chinese authorities' primary concern.

“Officials have used a change in rhetoric to acknowledge concerns that inflation-reduction policies such as currency appreciation are hurting many firms at a time when the outlook for external demand is uncertain and domestic demand is easing,” Mr Williams says.

“But they have fallen short of committing to adjust those policies.”

By the time the last firework fizzles out at next month's Olympics closing ceremony, the Chinese authorities will be in a better position to assess the state of global demand.

It may not just be the games, but the renminbi's three-year rally that is declared over.