October 14, 2012 6:21 pm

Renminbi – yuan direction

Stars are aligning for further China currency liberalisation

Please do not make the renminbi the focal point of the US presidential election agenda. That is the message sent by China in recent weeks as it allowed its currency to appreciate to a 19-year high on Friday against the dollar. It knows that manipulation of its currency is a popular scapegoat for the loss of US manufacturing and jobs.

Chart

No one knows for sure how much US policy drives China’s currency management. But the renminbi almost hit the upper limit of its daily trading band against the dollar on two consecutive days last week. That shows strength in demand against a backdrop of a weakening economy. If anything, the pressure is on for the renminbi to weaken. In spite of the slight rebound in September, growth in China’s exports has been weak this year; exporters are keeping more receipts in foreign currency, notes Crédit Agricole. Inflation is also manageable, at just 2 per cent last month. These are normally the criteria that would prompt the Chinese central bank to step in and halt renminbi gains.

Even so, while US presidential candidates debate Chinese currency manipulation, China is becoming less dependent on the US to drive its exports. The US was the destination for almost a quarter of China’s exports at the turn of the century. Now it accounts for just a sixth. Latin America and south-east Asia combined make up the same proportion. What is more, while the renminbi has appreciated by a fifth against the dollar in the past five years, it has appreciated by just over a 10th on a trade-weighted basis. Against the yen it has depreciated by a fifth. That helps to keep China competitive.

That competitiveness takes the pressure off China to use trade as the basis for its management of the renminbi. In addition, the growth of its foreign currency reserves is flattening. Both developments mean the stars are aligning for China to move further towards currency liberalisation.

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