China Comes Off The Renminbi Dollar Peg

This is a big news day. China has just announced that it is going to come off the dollar peg currency arrangement. Well it’s not that simple, they have announced a 2% appreciation of the currency against the dollar, and that the renminbi will now float against a basket of currencies. In fact this is a very ‘dirty’ float, since the trading price of the US dollar against the renminbi will now float within a trading band of plus or minus 0.3 per cent, while the band of other currencies against the renminbi will be set by the central bank, at least this is what the official statement says. How this will work will doubtless become clear in the coming days. Still a start is a start, and in many ways this is a historic day.

Update: Around the blogs: Brad Setser is well onto this. As is Daniel Dresner who points us to this Wall Street Journal report by Michael Phillips.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

13 thoughts on “China Comes Off The Renminbi Dollar Peg

  1. I’m going to keep looking around for views, and I will post in comments. This one from an AP writer is just silly:

    “The move could push up the price of Chinese exports to the United States and Europe. “The higher foreign exchange rate strengthens the domestic purchasing power and tends to lead to higher imports,” Eichel said. “The German economy should also profit from this.”"

    A 2% revaluation isn’t going to make much difference to anything, and anyway China has strong underlying producer price deflation as excess capacity comes online after several years of overinvestment, so the internal downward movement will more than compensate for this.

  2. Now this one makes sense:

    ““This was the tiniest and smallest move China could make,” said Stephen Jen, head of global currency strategy at Morgan Stanley in London. “The motivation for making such a small move is due to political concerns and that the Chinese could buy some time with the Americans.””

  3. Here in Malaysia, they’ve also taken the Ringgit offf the dollar peg, in fact at exactly the same time as China. Looks like the two countries have been talking more than I thought!

  4. FT: The PBoC said the exchange rate would be kept ?basically stable? and set with reference to a basket of unspecified currencies.

    I wonder why this is not revealed. To hamper speculation? as Ewdards says, there ain’t much dough to make with this.
    Or to give the Bush admin. an apparent “victory [...], which had urged Beijing to revalue but also fended off congressional demands for trade sanctions if China refused to move.”

    After all the military and economic sabrerattling from certain US qurters, maybe the Chinese are saying to themselves “this it, we’re pegging the renminbi to the euro”, which would further weaken the dollar’s droit de seigneurage value, and make this victory hollower than it now seems?

    what does it mean for american treasure bonds? that the US won’t need to emit as many as China sells more stuff to other countries and less to the US? or that China will soon start ditching them and send them to the bottom?

  5. “Or to give the Bush admin. an apparent “victory [...], which had urged Beijing to revalue but also fended off congressional demands for trade sanctions if China refused to move.”"

    Yep, I think at this stage this was more a political than an economic move. Just enough, the minimum as Jen says, to make it very difficult to say they are doing nothing. Of course this is only the begining, we’re on a drip feed.

    “this it, we’re pegging the renminbi to the euro”,

    The thing is this, the euro is weakening, and the dollar strengthening, so infact pegging nearer the euro (or having a controlled ‘dirty’ float with these characteristics) could lead to the yuan actually devaluing against the dollar, although I think for political reasons they will try hard to avoid this :).

    “or that China will soon start ditching them and send them to the bottom?”

    No, this is what China will not do. They will support treasuries for as long as they are dependent on the US as an export market, don’t crash your best customer. This gives the US a decade or so. After that, well…, you tell me.

    At some stage the Chinese economy will be bigger than the US one (not per capita – well maybe this too, but much, much later – but in absolute terms). The issue will then be how the US responds geopolitically to this changed reality. If China dumps US treasuries it will be because economics is simply war fought with other instruments.

  6. This one from an AP writer is just silly:

    “The move could push up the price of Chinese exports to the United States and Europe. “The higher foreign exchange rate strengthens the domestic purchasing power and tends to lead to higher imports,” Eichel said.

    Is that Hans Eichel, the German finance minister ?

  7. “Is that Hans Eichel, the German finance minister ?”

    Yes it is, but he may have been answering a much broader question, like ‘what will be the long term effects’, in which case he would be right.

  8. Edward,

    I’ve circled the globe reading stories on this one.

    Remarks from some economists surprised me. They have no clue. And obviously no experience in producing, marketing, or selling goods and services. Two percent movement is not a great concern.

    This is a 2% economic solution to a 20% political problem. The USA was outfoxed.

    China now has a black box from which it will extract its currency value.

    Magic.

  9. Hi there movie guy.

    Yes, I think you’re right.

    I think China is easily winning the ‘soft power war’. And who talks about Tibet these days. I’m not a conspiracy theorist, so I won’t indulge in idle speculation, but China is clearly the big winner in the ‘WoT’.

    Interestingly Stephen Jen in the MS GEF yesterday comes to the same conclusion I do: that if the euro weakens against the USD then, depending on the weighting of the basket, they may even depreciate USDwise. No ‘basket case’ strategy here.

    So they do Argentina in reverse: take the ride down, and get off before the return flight. A one way ticket. Chapeau.

  10. “I think China is easily winning the ‘soft power war’.”

    Well stated, Edward.

    I agree with you and Stephen.

    If the depreciation move happens, what do think the U.S. will do?

  11. “If the depreciation move happens, what do think the U.S. will do?”

    This is very hard to say. It would depend on the magnitude of the swing I guess. I want to be clear, I am not predicting this will happen, just pointing out that it is one, possible, unexpected outcome.

    I am still very beqarish on the euro. I think as we get past the summer, if Germany and Italy don’t strongly bounce back (and these two between them are responsible for a sizeable share of eurozone GDP), and if the political crisis continues, and if the monetary transmission mechanism continues not to function, and if structural reforms don’t accelerate, and if the balance of trade position of some of the economies continues to deteriorate, etc, etc, etc, then the euro will continue its downward drift.

    The GB pound also looks increasingly weak, so it is not at all improbable that the renminbi drifts along with the rest, especially if sizeable overcapacity problems show up in China.

    The US response? My feeling is that the US is too locked-in to China to back out now. Rhetoric is one thing, but destabilising China is another. So I guess we’ll see more of the same, unless and until things go one bridge to far.

  12. Well, Movie Guy, you-re trying to get me to speculate, and I won-t be drawn. Mainly because I genuinely don-t know. I think tipping points are hard to call, you know they are there, but very often the things which initiate the process are apparently trivial.

    An on top of the economic issues, there are a lot of geopolitical wild cards knocking about at the moment, which I guess you appreciate only too well.

    Nice to see your interest. I sure we will be back to these topics after the summer break.