from Follow the Money

Speculation on the renminbi to heat up?

October 7, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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It is hardly a secret that the head of China's central bank, Zhou Xiaochuan, favors letting the renminbi appreciate further.  He proposed a bigger revaluation in the summer, but was overruled by the state council.

Still I was a bit surprised that Zhou indicated that "[China] must look at whether the exchange rate is reasonable and balanced" and " as soon as possible, research, consider and resolve the problem."  He seemed to indicate that China's larger trade surplus suggests that a larger move in the renminbi may be required.   It should be noted that the FT put a rather different spin on Zhou's remarks than the WSJ.  The Journal emphasized the hint of possible currency appreciation; the FT emphasized Zhou's clear indication that resolving global imbalances would require increasing Chinese consumption.

Talk of allowing further appreciation seems to go against the central bank's efforts to discourage "speculation" and try to ward off additional hot money flows. 

But it also is music to US policy makers' ears - and Zhou will be talking to Alan Greenspan and John Snow this weekend, and to the finance ministers and governors of most of the world next week at the annual G-20 meeting.   No doubt, the Treasury would love to see a bit more "flexibility" from China before it sends its exchange rate report up to the Hill.

Zhou is absolutely right to emphasize that China also needs to take steps to increase its own domestic demand.   Exchange rate adjustment is important, but it is also not sufficient. 

"In the next three years, if domestic demand can't be expanded, the Chinese economy would increasingly rely on exports to maintain its growth momentum, which would incur greater pressure over issues like trade, the exchange rate and intellectual property rights," he said. 

"And [such issues] may inevitably be ‘politicised'," warned Mr Zhou.

In 2005, the FT reports net exports will about for about ½ of China's 9% growth.  Zhou, thankfully, recognizes that cannot continue.  His challenge is to find the appropriate policies to bring about consumption led growth in China.

One last note: now that China has officially revised its (previously absurdly low) estimates for its 2005 trade surplus to $100b, shouldn't the Asian Development Bank also revise its (also absurdly low) estimates for China's 2005 and 2006 current account surplus up once again?  The ADB's initial forecast (already revised up once) that China's current account surplus would fall to 1.2% of GDP in 2005 and 0.4% of GDP in 2006 does not look so hot right now.  Forecasting problems away in the absence of major policy actions generally does not make them go away. 

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