Posted by Gwen Robinson on Mar 08 10:30.

We recently reported on the various arguments in China currency-watching circles, at home and abroad, over the value of the renminbi. That was before we heard this week that China has now decided its dollar peg is “temporary”.

It certainly didn’t sound like Beijing believed that even a few months ago. But in the strongest hint yet that China is contemplating abandoning its unofficial dollar peg, in place since mid-2008, Zhou Xiaochuan, governor of the People’s Bank of China, said at the weekend that the currency peg had been a “special” policy to deal with the financial crisis.

As the FT notes on Monday, however, while the recent increase in consumer prices in China has boosted the case for a stronger currency, it is not clear the argument has won over the country’s top leaders.

While Zhou’s weekend remarks were strikingly bald for the normally discreet central bank (eg: “This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies”), he gave no hint about the possible timing of a policy shift.

Still, Zhou’s line contradicts recent comments from Chinese leaders in response to international criticism that the renminbi was undervalued. In December, China’s Premier Wen Jiabao said: “We will not yield to any pressure of any form forcing us to appreciate.”

Wen and other top Chinese officials have repeatedly emphasised the need for a stable exchange rate. But that was then. And now, there is clearly some momentum building in the middle ranks of Chinese officialdom in favour of a (upwards) revaluation.

That is all against a backdrop of growing concern about domestic prices, which according to the median estimate of a recent Reuters poll on Chinese consumer price inflation, are expected to have risen 2.3 per cent in February, year-on-year.

Indeed, Bloomberg reports on Monday that the median estimate in a survey of 20 economists was for a 5 per cent increase in the value of the renminbi to 6.50 against the dollar by March 31 2011.

That, however, doesn’t impress the ubiquitous Nouriel Roubini who, among his many (largely self-proclaimed) areas of expertise has now decided he knows how China’s leadership thinks.

As Roubini told Bloomberg (in the same report), China will limit the yuan’s appreciation to 4 per cent over the next 12 months because of a “super cautious” outlook on the global economy. He continued:

“It will be less than what they [China’s leadership] did in 2005 when everything was going right.. They will move by a token amount. The world is much cloudier in every dimension. They are super cautious.”

As the FT adds, the argument over Chinese currency policy has been at the forefront of a string of disputes that have weighed on already fraught relations in recent months between China and the US, including disagreements over Taiwan, Tibet, climate change and human rights.

Zhou’s different tone on the exchange rate came as the foreign minister said it was up to the US to improve relations between the two countries.

On the margins of the National People’s Congress in Beijing on Sunday, foreign minister Yang Jiechi told the press: “The responsibility for the difficulties in China-US relations does not lie with China. The US should take seriously China’s position and respect China’s core interests.”

Currency revaluation or not, that attitude might well reflect the tone for China’s deliberations on currency policy, too.

Related links:
China nullifies loan guarantees by local governments - Bloomberg
Consequences of a stronger renminbi dawn on the US – FT
China hints at redressing trade imbalance – FT
Chinese tightening? Yeah, right – FTAlphaville
What the PBoC can and can’t do with its reserves - MichaelPettis

This entry was posted by Gwen Robinson on Monday, March 8th, 2010 at 10:30 and is filed under Capital markets. Tagged with , .

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