More on China’s Renminbi Headfake

It was hard to miss the Chinese central bank’s announcement last weekend that it was implementing a ore “flexible” policy toward managing its currency. Numerous Western officials and analysts declared the statement to be a major move, signaling China’s willingness to allow the renminbi to appreciate to a meaningful degree. We, by contrast, called it a a non-statement to silence Westerners calling for a revaluation in the runup to the Toronto G-20 meeting later this month:

China has committed to do…..absolutely nothing. In fact, this language could just as easily be used to justify shifting its dirty float to be against the dollar (which is now comparatively strong and will continue to be so as long as the eurozone is on its austerity kick) to putting greater weight upon the euro in its basket, which would lead to a devaluation against the dollar. Note I am not saying that will happen, but the announcement does not preclude that idea if China’s trade surplus were to deteriorate

China allowed the renminbi to appreciate a grand total of 0.39% against the dollar this week. leading commentators to rethink China’s canny ploy. Today, the Financial Times gives a reassessment. It notes in particular that domestic interests are fiercely opposed to a rise of a mere 2-3% against the dollar, much the less the 20% to 40% that most experts deem necessary to achieve fair value. In addition, it stresses the possibility we mentioned in February: that China could devalue the renminbi.

From the Financial Times:

Yet at home the decision has been taken rather differently in many circles. For the past few months the Ministry of Commerce has been conducting a battle to avoid any appreciation at all against the dollar – one of the vice-ministers even warned earlier this year: “Water doesn’t boil if it is heated to 99 degrees Celsius. But it will boil if it is heated by one more degree.”

But so far this week the reaction has been positive.

One reason is that it has viewed the announcement through different glasses, assuming that the central bank means what is says about a more “flexible” exchange rate – in other words a currency that can go down as well as up.

Mei Xinyu, a researcher at the ministry, made it clear in an interview on Thursday that opposition to an appreciation of even 2-3 per cent remains strong. “It would be a huge blow to our labour-intensive industry,” he said. But the shift in policy to a more flexible exchange rate system was a good thing, he added, because “Chinese exporters have already had to shoulder the burden of other currencies’ depreciation”, a reference to the slump in the value of the euro, the currency of China’s biggest export market.

His message was this: while foreign governments might see the new policy as a passport to a stronger renminbi, China’s export lobby is welcoming it as a way of protecting itself from a weaker euro. Those objectives could easily conflict.