The yuan fell by the most in almost two weeks versus the dollar on speculation the central bank wants to slow the appreciation to limit the impact on exporters. The currency dropped for a third day as the People's Bank of China may seek to deter speculators from betting on one-way moves after the yuan had its biggest advance last week of 2008. Forward contracts yesterday showed traders were the most bullish on the outlook for gains in the currency since a link to the dollar was scrapped in July 2005.
I am not sure if the PBoC is trying primarily to help exporters or to scare off speculators, but if the latter, as I suspect, it suggests that hot money inflows are a problem, although regular readers probably already knew that I would say that. As an aside, the Ministry of Commerce announced yesterday that January FDI was $11.2 billion, more than twice what it was in January 2007 ($5.3 billion). They didn’t explain why the big jump occurred, especially surprising since the increased corporate income tax on foreign investors which took effect this year should have caused FDI to be accelerated last year, but I wonder if part of the reason for the surge is that even “real” investors want to take advantage of the expected RMB appreciation.It is worth watching FDI numbers over the next few months to see if they remain high – this really doesn’t make the PBoC’s job much easier.
There are some rumors that the PBoC may generally slow the rate of appreciation this year because of concerns about the impact on the economy, but I don’t think this is very likely. I think it largely represents attempts to talk down the market, although if there is a sharp slowdown in the next few months at least some of the blame will go to the PBoC’s more rapid appreciation of the RMB.Nonetheless most analysts are raising their expectations about where the RMB will end this year.
One last piece of news, today the PBoC announced that the Corporate Goods Price Index (formerly known as the Wholesale Price Index) rose 1.1% month-on-month in January and rose 8.4% year on year.Not surprisingly these numbers were viewed with dismay since they suggest continued inflationary pressure. Every bank out there has been recently revising their 2008 inflation expectations upward – I expect these upward revisions will continue.
There is one other motivation of slow appreciation in 2008: U.S. election. No matter who becomes the next president, China will be asked to appreciate. So the appreciation this year will be ignored unless it is a very huge appreciation, which is not likely since 1) this year is very difficult, a huge appreciation will add the pain; 2) every new president always has some problems with China, exchange rate is one of the easiest to deal with. Thus, there are incentives to make it slow and leave some room for 2009.
By fatbrick - 2/25/2008 10:15 PM
I think you are putting too much emphasis on what the US wants. The PBoC and many policy-makers have made it clear that they believe the currency regime is a problem for China because of its impact on domestic monetary policy. The real reason for appreciating is that money growth is excessive and inflation seems to be picking up. The PBoC waited far to long before adjusting, and now it needs to do it. What happens during or after the US election may be relevant, but it is not the sole determinant by any means.
By Michael Pettis - 2/26/2008 11:21 AM
But remember, there will be a point when the RMB is at a market-equilibrium with the USD. How will we recognise this point? By looking at speculative flows or at trade? When will we stop taking for granted that the RMB is undervalued?
By Stefan, Tallinn - 2/26/2008 6:21 PM
That's an important question, Stefan. There is no credible way for the PBoC to signal when enough is enough, even if it were possible to know when that point has been reached. Other countries' experiences suggest that appreciation encourages speculative inflows and speculative inflows force appreciation.
By Michael Pettis - 2/26/2008 7:26 PM
You do not underestimate politician's leverage. The protectionism is a much higher threat to China than inflation.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (5) for "RMB appreciation slows, but ...
December, 2007
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