Wednesday, August 02, 2006

Steady appreciation of the renminbi 0 comments



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There can be little doubt that the managed float of the renminbi is going to lead to a steady upward appreciation of the renminbi. In fact, if the People's Bank of China, the de facto central bank, did not actively intervene, it would have appreciated more rapidly. Nevertheless, since it switched to a managed float system in July last year, the renminbi has appreciated from ~8.1 to the dollar to ~7.95 to the dollar today, or about 2%.

Given that China runs a perpetual trade surplus and now has one of the largest foreign reserves in the world, plus the fact that it has been one of the (or is it THE) world's largest recipient of direct foreign investment, it is natural that its currency should revalue upwards. Speculators betting on this have been disappointed so far. The China government directs its foreign capital to high-quality foreign assets (eg. US Treasuries). But circumstances now look to favour a more accelerated upward edging of the renminbi.

The China government appears to be serious on slowing the economy, looking at the recent slew of moves to curb liquidity (reserve ratios and interest rates raised), restrict foreign speculative capital (eg. property) and foreign acquisitions of local companies (by introducing additional approving authorities), and general directives to various provinces to curb excessive fixed asset investments. Given that the prerogative of sustainable development is to be driven by domestic demand expansion, the purchasing power of locals will be strengthened by a stronger renminbi, boosting imports. At the same time, the cut in rebates to exporters of steel, textiles and other basic goods while export rebates to higher-technology products are increased suggests that the long-term emphasis on exports will shift from quantity to quality, from low value-add to high value-add. To be sure, this has been a stealth trend recently as China companies have been seeking to establish international acceptance by building brands (eg. IT industry), innovating, and setting standards (eg. software & telecoms), while moving away from traditional manufacturing. Assuming this is the future export focus, a renminbi appreciation would prove to be another way to divert resources towards the fulfilment of such an export policy.

What this means is that China companies relying on traditional competitive strengths of low input costs, with little product value-add through innovation and systems design and integration, would be hit due to less competitive export selling prices (unless they have a domestic market). Manufacturers would probably be hit more than brand owners, because they will have less pricing power, while more labour-intensive operations would similarly be hit more than capital intensive ones, because labour is typically local while capital can be imported (at lower renminbi costs if the currency appreciates).

References:
(1) RatesFX: CNY vs USD
(2) People's Daily article Aug 05: Yuan's appreciation by appropriate margin benefits China in general
(3) International Business Times article Jul 06: China to Cut Export Rebates

 

 

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