An October 24 article on Reuters (“China’s NDRC unaware of yuan revaluation report” has a tantalizing story:
A news department official at the National Development and Reform Commission said on Wednesday he was not aware of an in-house report suggesting that China should consider a one-off yuan revaluation of 15-20 percent. Celebrex generic: market News International said that the internal NDRC report summarized the economic issues facing China and was distributed to leaders of the planning agency prior to the Communist Party Congress that ended on Monday.
Premier Wen Jiabao has repeatedly ruled out another one-off revaluation. China revalued the yuan by 2.1 percent against the dollar in July 2005 and has since let it rise another 8.2 percent – celebrex generic.
In May I wrote pieces for the Far Eastern Economic Review and the Wall Street Journal explaining why I believe a large one-off revaluation (15% or more) followed by a credible peg is the only workable alternative for the PBoC in regaining control of monetary policy; celebrex generic. The proposal might have seemed completely crazy at the time and was likely to be rejected out of hand by almost any analyst or government official, but I argued that over time (within a year) I believed that a consensus would develop that this was at least a possible topic of discussion.
It looks like this is beginning to happen, and I think that policy discussions are increasingly going to move in that direction. I think by now there is definitely a consensus that China needs to speed up the process of revaluation, both for domestic reasons and to head off increasingly angry US and European officials, but because of its impact on encouraging hot money inflows I think a policy of faster revaluation is too risky and will cause further destabilizing inflows It also runs the risk of significantly overshooting because there is no credible way to signal to the market when enough is enough, and hot money inflows will pour into China even long after the currency has reached a reasonable level, whatever that may be. A speeding up of the revaluation in the trading band will only get China all the well-known evils of revaluation but none of the benefits (a reversal of capital inflows)
My guess? China’s money supply and trade surplus will continue to surge – even a US slowdown will have no impact, as I explain in yesterday’s entry – celebrex generic. Inflation will stay high and probably even rise. Some time in the first quarter of next year officials will become so concerned about China’s out-of-control monetary policy that the consensus will move increasingly in the direction of a one-off maxi-revaluation, although that probably won’t happen until after the Olympics.
Two additional points: First, even if the consensus moves in the direction of a maxi-revaluation, the government will flirt with the idea of a much smaller-than-needed jump – perhaps 5-10%. That would be a terrible choice because the markets will know that this isn’t enough to rebalance capital flows and investors and businessmen would immediately make big speculative bets that there will be one or two more moves. The risk is that even when the government has revalued a second time and done all it needs and wants to do, it wouldn’t be credible, and so these “one-off” revaluations would simply encourage more speculative inflows.
Two, monetary growth has been so excessive that China will suffer a financial contraction anyway even if it were to revalue tomorrow. But since the contraction is likely to come after the maxi-revaluation, there will be a terrific temptation to claim a repeat of Japan in the 1980s – the crisis happened not despite but because of the revaluation. It will all be the fault of the US – celebrex generic. Celebrex generic: the argument doesn’t make sense in Japan – the bubble there was created by letting money supply expand too quickly before the revaluation, and when Japan finally accepted the need to revalue, it turned the adjustment process into a one-way bet for speculative inflows. For similar reasons it will not make sense in China, but it will be politically very popular nonetheless to blame the US for the ensuing contraction.
– celebrex generic