January 26, 2005 5:15 pm

The Short View: Is revaluing the renminbi likely?

Will China revalue the renminbi this year or not? The markets got briefly excited on Wednesday after a Chinese official said that there would be a “deep dialogue” about the issue at next week’s G7 meeting in London. But only on Tuesday, the head of the Chinese National Bureau of Statistics told Reuters that the country “doesn’t have conditions to adjust the renminbi exchange rate at present.”

Spice has been added to the debate by recent Chinese statistics. First, there was a record monthly trade surplus of $11.1bn. That will raise the hackles of US politicians who are concerned about “unfair” Chinese competition. then there were the latest gross domestic product numbers, which showed that China grew by 9.5 per cent last year. Those numbers do not suggest China is slowing down. On the other hand, inflation dropped to 2.4 per cent in December from 5.3 per cent earlier in the year.

The evidence that China “needs” to revalue its currency is thus rather mixed. Stephen King, the HSBC economist, argues the case for a revaluation is very weak: a modest revaluation would not be the best way of slowing the Chinese economy and, in any case, China’s real exchange rate may steadily appreciate because of higher inflation than the developed world.

As to the political argument, it seems likely that the Chinese will resist US pressure. Paul Chertkow, head of global currency research at Bank of Tokyo-Mitsubishi, said he doubts the Chinese “will announce a timetable for an adjustment of the peg, let alone an effective revaluation of the size likely to mollify US manufacturing associations.” HSBC’s Mr King points out that even a 25 per cent revaluation of the renminbi would make little difference to the US economy.

The markets seem to be making their bets on a Chinese revaluation through the medium of the yen. According to Ashraf Laidi, chief currency analyst at MG Financial Group, “A revaluation in the renminbi would mean Asian nations could allow their currencies to appreciate against the dollar while offsetting any negative impact on their competitiveness through a decline against the rising renminbi. Therefore, a delay in a renminbi revaluation will have the opposite effect and pressure the Asian currencies including the Japanese yen.”

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