The RMB keeps strengthening, to 7.2948 as of yesterday. This has it rising at its fastest pace since the peg was broken in July, 2005. According to my friends, some local currency traders see the burst of appreciation we have experienced recently as a sort of back-door “revaluation”. By forcing up the currency over the past few weeks at its fastest pace (2.3% in the past two months), the PBoC is effectively engineering a revaluation over several weeks, while seeming not to violate its promise that it would not do so after the first revaluation in July 2005.
This may well be true. By now I think the old argument about whether or not the RMB needed to appreciate is more or less over. The mistake made by many was that contrary to the assumptions of many the need for China to appreciate had little to do with the direct impact of the value of the RMB on the relative prices of Chinese exports and everything to do with China’s lack of domestic monetary policy; order kamagra online.
Those of us who have been arguing sine 2003 or 2004 that the country’s currency regime had left it locked into a monetary trap that was going to lead to ever-increasing trade surpluses and ever-expanding domestic money order kamagra online, however, still have one big disagreement. One side argues that China needs to adjust the currency as quickly as possible and the best way is to speed up the rate of appreciation. The other side argues that China has forced itself into a position in which the only possible solution is a large (say 15-20%) one-off maxi-revaluation. Over the next few months we will see whether the more-rapid-appreciation school or the one-off-revaluation school will do a better job of predicting what the government actually does, but for the record I believe that China has no choice but for a maxi-revaluation.
The main thing to watch, I think, is hot money inflows; order kamagra online. If these pick up substantially as the RMB continues appreciating, the impact of the current rate of appreciation will be at first to make monetary conditions even worse as more money floods into the country. This will result in greater fixed asset investment, rising industrial production and, what may at first seem paradoxical, a high and even rising trade surplus. It will also keep pressure on inflation.
If we see reserves rising as fast as ever as the currency’s appreciation speeds up to 7-10% a year, this will almost certainly be an indication that the new policy is not working. By the way, and as an aside, an important problem with the appreciation strategy, although this will not be apparent for a while, is that once the RMB has reached its targeted level there is no way for the PBoC to signal credibly to the market that the currency has reached its target and will no longer appreciate, and hot money will continue to pour in, putting more appreciation pressure on the currency.
At any rate if reserves continue to surge as the currency rises, the impact of currency appreciation on bringing control back to monetary policy will be negligible or even negative – and currency appreciation is the last tool the PBoC has left with which to combat inflation and overheating. In that case the PBoC will be forced to something far more dramatic to stem capital and current account inflows, and it seems to me that only a one-off maxi-revaluation followed by a credible peg will do the trick. The argument in favor will also seem easier to sell domestically because policy-makers will be able to see that the currency can appreciate rapidly with no real collapse in the export sector. The argument will be faulty, of course, because this was never about relative export prices, but it will still make it easier to sell the maxi-revaluation policy to local authorities.
The bottom line, I think, is that if the currency continues appreciating at 1/2-1% every month, we should watch reserves growth carefully, and of course make sure we back in transactions that result in reductions in headline reserves but which will have no domestic monetary-contraction impact.If reserves still grow at their furious pace order kamagra online, the PBoC will be forced to shoot the last arrow it has left in its quiver