from Follow the Money

So, is something about to happen to the RMB/ $

April 29, 2005

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China now thinks its financial system is ready for a bit of exchange rate flexibility, at least if you believe the China Securities Journal.

I am not sure what has changed, but since I -- like the Goldman Sachs team -- tend to think that the peg is weakening, not strengthening the banking system, I am not going to quibble.

Usually, the Chinese RMB sticks tightly to the 8.276 upper limit of its (tiny) trading band. But ever so briefly, it rose to 8.270 today ...

Don’t forget, Chinese citizens (along with folks in Hong Kong and Taiwan with close ties to the mainland) are doing most of the speculation on the RMB. They -- not Western Hedge funds -- know how to skirt China’s capital controls. And they sure seem to be betting on an RMB appreciation.

And lots of other people around the world are watching the RMB closely right now as well, with good reason. Few prices matter more the world economy right now.

Who knows? I certainly don’t. But pressure for change certainly seems to be building. The Chinese leadership knows that it has to move before the fall -- and may well want to move sooner rather than later to try to nip building protectionist sentiment against China in the bud. Looking ahead, they have to know that surging Chinese exports to the US, a surging Chinese trade surplus with the world and a slowing US economy will produce the political equivalent of a perfect storm if they cling closely to the current peg ...

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