LexisNexis(TM) Academic - Document
Financial Times (London, England)
July 22, 2005 Friday
London Edition 1
SECTION: LEADER; Pg. 18
LENGTH: 456 words
HEADLINE: Making sense of China's choice Yesterday's move is only a start: what happens next?
BODY:
China's announcement that it is revaluing the renminbi and switching to a new currency regime based on an adjustable peg against a basket of currencies may prove to be a defining moment in global economic history. Yet for now its significance remains deeply ambiguous.
The initial step, a 2 per cent revaluation against the dollar, is of primarily political importance. China is signalling that it is willing to accept the system responsibilities that come with being a leading member of the world economy.
Beijing evidently hopes this will ease protectionist pressure in the US, above all in Congress, at a time when the CNOOC/Unocal bid is hanging in the balance, and Chinese president Hu Jintao is preparing for a visit to Washington. Whether it is enough to achieve this object remains to be seen.
The economic significance of the 2 per cent revaluation is very small. It will not make any difference to the US current account deficit or broader global imbalances. Most estimates suggest the RMB is at least 15-30 per cent undervalued on current policies.
All attention, therefore, should focus on the new currency regime. By switching to an adjustable peg system Chinese policymakers have given themselves maximum flexibility. But from here the path forks.
China could decide either to hold the currency close to the new rate, in which case the new regime would be utterly inadequate. Or it could operate it as something approaching a crawling peg, in which case it may not be.
The daily trading band of 0.3 per cent is very narrow. But China could allow the currency to appreciate by this amount daily. Over time that could add up to a significant revaluation: 15 per cent in less than two and a half months.
Moreover, as Malaysia's decision to drop its dollar peg yesterday demonstrated, where China leads the rest of Asia will follow. Sizeable pan-Asian revaluation would greatly reduce global imbalances.
However, it is dangerous to cross a chasm in small steps. By opting for gradual revaluation rather than a bigger one-off adjustment, China is offering speculators a one-way bet. It risks generating a wave of capital inflows that could inflate asset markets and lay the seeds of a bad debt crisis.
China is not powerless. It can intervene to stop its currency appreciating, as long as it is willing to accumulate ever more reserves and can sterilise the increase in the money supply. And it evidently has not reached the limit of its ability to sterilise.
But market pressure will not go away. Nor will pressure from Congress and the US administration. If Beijing understands that further revaluation and other reforms must follow swiftly, all well and good. But if it thinks it can rest here for a year or two, it is badly mistaken.
LOAD-DATE: July 21, 2005
July 22, 2005 Friday
London Edition 1
SECTION: LEADER; Pg. 18
LENGTH: 456 words
HEADLINE: Making sense of China's choice Yesterday's move is only a start: what happens next?
BODY:
China's announcement that it is revaluing the renminbi and switching to a new currency regime based on an adjustable peg against a basket of currencies may prove to be a defining moment in global economic history. Yet for now its significance remains deeply ambiguous.
The initial step, a 2 per cent revaluation against the dollar, is of primarily political importance. China is signalling that it is willing to accept the system responsibilities that come with being a leading member of the world economy.
Beijing evidently hopes this will ease protectionist pressure in the US, above all in Congress, at a time when the CNOOC/Unocal bid is hanging in the balance, and Chinese president Hu Jintao is preparing for a visit to Washington. Whether it is enough to achieve this object remains to be seen.
The economic significance of the 2 per cent revaluation is very small. It will not make any difference to the US current account deficit or broader global imbalances. Most estimates suggest the RMB is at least 15-30 per cent undervalued on current policies.
All attention, therefore, should focus on the new currency regime. By switching to an adjustable peg system Chinese policymakers have given themselves maximum flexibility. But from here the path forks.
China could decide either to hold the currency close to the new rate, in which case the new regime would be utterly inadequate. Or it could operate it as something approaching a crawling peg, in which case it may not be.
The daily trading band of 0.3 per cent is very narrow. But China could allow the currency to appreciate by this amount daily. Over time that could add up to a significant revaluation: 15 per cent in less than two and a half months.
Moreover, as Malaysia's decision to drop its dollar peg yesterday demonstrated, where China leads the rest of Asia will follow. Sizeable pan-Asian revaluation would greatly reduce global imbalances.
However, it is dangerous to cross a chasm in small steps. By opting for gradual revaluation rather than a bigger one-off adjustment, China is offering speculators a one-way bet. It risks generating a wave of capital inflows that could inflate asset markets and lay the seeds of a bad debt crisis.
China is not powerless. It can intervene to stop its currency appreciating, as long as it is willing to accumulate ever more reserves and can sterilise the increase in the money supply. And it evidently has not reached the limit of its ability to sterilise.
But market pressure will not go away. Nor will pressure from Congress and the US administration. If Beijing understands that further revaluation and other reforms must follow swiftly, all well and good. But if it thinks it can rest here for a year or two, it is badly mistaken.
LOAD-DATE: July 21, 2005
posted by Eastlaw at Saturday, July 23, 2005
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