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Copyright 2005 The Financial Times Limited
Financial Times (London, England)
July 22, 2005 Friday
London Edition 1
SECTION: RENMINBI REVALUATION; Pg. 11
LENGTH: 782 words
HEADLINE: Aim is to allow greater flexibility while still keeping firm control STRATEGY
BYLINE: By RICHARD MCGREGOR
DATELINE: BEIJING
BODY:
The timing of Beijing's symbolic break with the US dollar peg was as much about politics as policy, allowing Hu Jintao, China's president, to travel to Washington in September fending off rising congressional criticism that Beijing is keeping its currency artificially low.
But the content of last night's announcement of a new currency regime was more policy that politics, as it gives China greater flexibility in managing the renminbi, while still maintaining an array of tools to keep fluctuations to a minimum.
"This is an important step towards a market-based exchange rate regime and gives business, domestic exporters in particular, a signal that the renminbi's value can be adjusted," said Song Guoqing, of Peking University.
With a closed capital account keeping international hedge funds and other well-funded overseas currency traders out, the People's Bank of China (PBoC), the central bank, will tower over other participants in the local exchange market.
As a result, any adjustments that are made in the short-term will largely be at the discretion of the central bank, and not China's underdeveloped and thinly traded money markets.
The government and the PBoC still see currency stability as a key plank in the management of the macro economy, and have no desire to allow the renminbi to become a daily plaything of speculators to upset that.
More important, they have the means to prevent it. "It is much easier to reform your currency when you have a closed capital account," said Frank Gong, chief China strategist with JP Morgan in Hong Kong.
The PBoC has reinforced the need for relative stability by announcing only a small revaluation, of 2.1 per cent against the US dollar to Rmb8.11, and setting a tiny daily band, of 0.3 per cent, within which the renminbi can fluctuate.
The central bank also said that it would set the new rate "with reference" to a currency basket, an indication that such movements will not bind China's hands in deciding on a value for its currency.
The bank has added a number of other weapons to its armoury of controls for the new regime, in separate announcements last night and earlier this month.
The bank last night raised the interest rate payable on local deposits of HK and US dollars, to increase the cost to any individuals and institutions which want to use this money to buy the renminbi.
China recently introduced new controls on bringing foreign currencies into China, with the same aim in mind.
China-based academics and foreign bank analysts were divided about whether last night's move was the first of a number of gradual steps over the next 12 months, or whether further upward movements would take much longer.
Prof Song said the renminbi would experience only "gradual adjustments" until the establishment of a free-floating currency. "But that takes time - there won't another move in the second half," he said.
Mr Gong of JP Morgan disagreed, saying he expected another 5 per cent by the end of the year, and a total of 10 per cent in 12 months.
Certainly Washington may be demanding further revaluations soon, something that Chinese analysts saw as a potential downside to the announcement.
"Such a small adjustment may well intensify the expectation for a further rise in the value of the renminbi," said He Fan, of the Chinese Academy of Social Sciences. "And by repegging the renminbi to a basket of currencies rather than the dollar, we have actually made no fundamental change, as the peg still remains."
Mr He reckoned that the next move could be to loosen controls on capital flows and widen the ban in which the renminbi can fluctuate to 1 or even 3 per cent.
Any other moves, if they do come within the next six to 12 months, are likely to be small, for the same reason that last night's revaluation was only 2.1 per cent.
On top of the leaders' desire for only gradual change in the currency, Chinese politicians are keen not to be seen to be reacting to foreign pressure.
Chinese leaders have stressed this in numerous public statements in recent months, one reason why officials in Beijing were relieved that the public pressure from the US has abated since late June.
"There is clearly much better co-ordination between the US and China," said Mr Gong.
In the short-term, however, there is one issue that the two sides cannot co-ordinate and that the small currency change will barely impact on: China's large and growing bilateral trade surplus with the US.
It has been the trade surplus which has provided the ammunition to Congress for their attacks on the renminbi. President Hu may hope that last night's move will make the renminbi a much smaller target, in time for China to mint a revised strategy to deal with the US.
LOAD-DATE: July 21, 2005
Financial Times (London, England)
July 22, 2005 Friday
London Edition 1
SECTION: RENMINBI REVALUATION; Pg. 11
LENGTH: 782 words
HEADLINE: Aim is to allow greater flexibility while still keeping firm control STRATEGY
BYLINE: By RICHARD MCGREGOR
DATELINE: BEIJING
BODY:
The timing of Beijing's symbolic break with the US dollar peg was as much about politics as policy, allowing Hu Jintao, China's president, to travel to Washington in September fending off rising congressional criticism that Beijing is keeping its currency artificially low.
But the content of last night's announcement of a new currency regime was more policy that politics, as it gives China greater flexibility in managing the renminbi, while still maintaining an array of tools to keep fluctuations to a minimum.
"This is an important step towards a market-based exchange rate regime and gives business, domestic exporters in particular, a signal that the renminbi's value can be adjusted," said Song Guoqing, of Peking University.
With a closed capital account keeping international hedge funds and other well-funded overseas currency traders out, the People's Bank of China (PBoC), the central bank, will tower over other participants in the local exchange market.
As a result, any adjustments that are made in the short-term will largely be at the discretion of the central bank, and not China's underdeveloped and thinly traded money markets.
The government and the PBoC still see currency stability as a key plank in the management of the macro economy, and have no desire to allow the renminbi to become a daily plaything of speculators to upset that.
More important, they have the means to prevent it. "It is much easier to reform your currency when you have a closed capital account," said Frank Gong, chief China strategist with JP Morgan in Hong Kong.
The PBoC has reinforced the need for relative stability by announcing only a small revaluation, of 2.1 per cent against the US dollar to Rmb8.11, and setting a tiny daily band, of 0.3 per cent, within which the renminbi can fluctuate.
The central bank also said that it would set the new rate "with reference" to a currency basket, an indication that such movements will not bind China's hands in deciding on a value for its currency.
The bank has added a number of other weapons to its armoury of controls for the new regime, in separate announcements last night and earlier this month.
The bank last night raised the interest rate payable on local deposits of HK and US dollars, to increase the cost to any individuals and institutions which want to use this money to buy the renminbi.
China recently introduced new controls on bringing foreign currencies into China, with the same aim in mind.
China-based academics and foreign bank analysts were divided about whether last night's move was the first of a number of gradual steps over the next 12 months, or whether further upward movements would take much longer.
Prof Song said the renminbi would experience only "gradual adjustments" until the establishment of a free-floating currency. "But that takes time - there won't another move in the second half," he said.
Mr Gong of JP Morgan disagreed, saying he expected another 5 per cent by the end of the year, and a total of 10 per cent in 12 months.
Certainly Washington may be demanding further revaluations soon, something that Chinese analysts saw as a potential downside to the announcement.
"Such a small adjustment may well intensify the expectation for a further rise in the value of the renminbi," said He Fan, of the Chinese Academy of Social Sciences. "And by repegging the renminbi to a basket of currencies rather than the dollar, we have actually made no fundamental change, as the peg still remains."
Mr He reckoned that the next move could be to loosen controls on capital flows and widen the ban in which the renminbi can fluctuate to 1 or even 3 per cent.
Any other moves, if they do come within the next six to 12 months, are likely to be small, for the same reason that last night's revaluation was only 2.1 per cent.
On top of the leaders' desire for only gradual change in the currency, Chinese politicians are keen not to be seen to be reacting to foreign pressure.
Chinese leaders have stressed this in numerous public statements in recent months, one reason why officials in Beijing were relieved that the public pressure from the US has abated since late June.
"There is clearly much better co-ordination between the US and China," said Mr Gong.
In the short-term, however, there is one issue that the two sides cannot co-ordinate and that the small currency change will barely impact on: China's large and growing bilateral trade surplus with the US.
It has been the trade surplus which has provided the ammunition to Congress for their attacks on the renminbi. President Hu may hope that last night's move will make the renminbi a much smaller target, in time for China to mint a revised strategy to deal with the US.
LOAD-DATE: July 21, 2005
posted by Eastlaw at Friday, July 22, 2005
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