As Japan and Switzerland have opened new fronts in the currency wars, China’s renminbi has taken a backseat. But the original aggressor - by dint of firmly controlling its currency - is still facing its own forex pressures.

The renminbi this month has been allowed to rise against the dollar at an annualised rate of about 11 per cent, compared with an average 4 per cent this year.

Small wonder; recent numbers have shown still high inflation and Wednesday saw a surprise spike in China’s trade surplus to $31.5bn - implying a faster growth in the dollar rate its reserve managers must invest. For them, the action against the Swissie and the yen just make their job harder, since it would seem impolitic for China to buy in, as Japan and Switzerland sell.

Where else? China is keen to diversify out of dollars and after the weekend spat with the US over its indebtedness, further active inflows seem unlikely.

That leaves the euro, which as the second-biggest global currency, they have been investing in for some time. Interestingly, a chart of the euro and dollar against China’s reserve growth shows the euro’s two most recent periods of weakness correspond exactly with a drop-off in reserve accumulation.

However, its hard to sell the euro as an attractive place for further investment right now.

Could this lead China to reconsider its own currency stance?

Allowing faster appreciation is one option and would help cool inflation. But allowing gains has failed to relieve much pressure so far.

The other option is to remove the problem by letting the renminbi float. China has consistently made clear it will liberalise only when it suits it to do so. Given the growing difficulties of finding places big, and attractive enough, to deploy its holdings, this could perhaps be closer than we think.

James Mackintosh is away

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