President Obama weighed in on the dispute over the correct exchange rate of the Chinese renminbi during last week’s trip to Asia, saying “enough is enough” in regard to China’s policy of slow currency appreciation against the dollar.
But despite Obama’s strong words, currency strategists say that very slow appreciation is likely as the Chinese government deals with a slowdown in the economy. A key factor will be what happens with inflation.
Daniel Hui, senior currency strategist at HSBC Holdings in Hong Kong, says says two groups within the Chinese government are arguing over the exchange rate. One is the People’s Bank of China, which wants a more flexible rate and more-liberalized markets, and the other is the export lobby’s supporters, who favor a cheaper renminbi.
“At times when there is more inflation pressure, the politburo is primarily concerned about inflation,” Hui says. “That’s when those arguing for more flexibility tend to win out.”
In fact, inflation in China has slowed recently. The country reported that its consumer price index rose 5.5 percent on an annualized basis in October, down from 6.1 percent in September. Food prices, which have been a matter of concern for Chinese authorities, rose 11.9 percent on an annualized basis, down from 13.4 percent a month earlier.
The renminbi, currently trading at about 6.32 to the dollar, has appreciated about 5 percent so far this year.
Robert Minikin, senior foreign exchange analyst at Standard Chartered in Hong Kong, expects the slow appreciation to continue through the end of next year.
“Our view is that there may be upward pressure on the dollar, but further out we still expect the dollar to weaken and the renminbi to appreciate all the way through next year,” Minikin says.
He notes that the renminbi, which tends to increase rapidly after international events such as the recent Group of 20 meeting and the summit of Asian leaders in Bali, could be vulnerable to short-term weakening because of deterioration China’s balance of payments caused by a slowdown in exports.
“I think that argues for some rebound in the dollar in the short term, even as we expect the renminbi to appreciate in the medium term,” Minikin says.
Some investors predict that China will cut interest rates in an effort to boost its economy because exports have slowed to both Europe and the U.S., where the economies are relatively anemic.
There even have been some calls for China to devalue the renminbi because of capital outflows. Fan Jianping, chief economist at the State Information Center, a Chinese government think tank, says Beijing should let the renminbi weaken because other emerging-markets currencies have fallen.
Fan says capital outflows have already caused big depreciations in places like Russia and Brazil. “If we also face similar outflows, then we should have the conditions for depreciation,” he says. Chinese foreign exchange reserves declined by $61 billion in September, though they are still a very high $3 trillion.
HSBC’s Hui says he doubts the Chinese will pursue a devaluation because the country “will lose a lot if they deliberately destabilize the currency market.” Not only are offshore investors long the renminbi, he says, but domestic Chinese investors also believe the currency is on a course for slow appreciation, and a devaluation would be destabilizing at home too.
According to Hui, Chinese officials no longer believe the renminbi is greatly undervalued. However, U.S. officials and academics believe it is undervalued by as much as 40 percent.
