Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
When it comes to the vexed question of China’s currency, everything has changed and nothing has changed.
China dropped a bombshell last Saturday night when it announced the end of its two-year peg to the dollar and in the process it seemed to eliminate the risk that the bitter battle over its exchange rate would escalate into a trade war.
Yet near the end of the first week of trading under the new regime, the renminbi has only appreciated against the dollar by the grand total of 0.39 per cent. When the Chinese central bank said there would be no dramatic movements in the exchange rate, it clearly was not kidding.
The weekend statement was purposefully vague, but one of the interesting aspects is the way many people inside and outside the country have drawn very different conclusions from it.
The response from other G20 capitals was immediate and positive. After an adviser to the central bank called it the end of “anti-crisis” policies, the assumption was that China would resume its pre-crisis crawling peg against the dollar, which had seen the renminbi gradually appreciate.
The sighs of relief did not just come from Tim Geithner at the US Treasury who was facing a querulous Congress and increasing pressure to label China a “currency manipulator”. The prospect of a stronger renminbi was also good news in lots of other developing country capitals. Some of those countries have been implementing capital controls to prevent their currencies rising too quickly, while watching competition from Chinese companies get ever-more fierce. China’s exports to Brazil, Russia and the Asean area were up 110, 92 and 48 per cent in May, year on year.
Yet at home the decision has been taken rather differently in many circles. For the past few months the Ministry of Commerce has been conducting a battle to avoid any appreciation at all against the dollar – one of the vice-ministers even warned earlier this year: “Water doesn’t boil if it is heated to 99 degrees Celsius. But it will boil if it is heated by one more degree.”
But so far this week the reaction has been positive.
One reason is that it has viewed the announcement through different glasses, assuming that the central bank means what is says about a more “flexible” exchange rate – in other words a currency that can go down as well as up.
Mei Xinyu, a researcher at the ministry, made it clear in an interview on Thursday that opposition to an appreciation of even 2-3 per cent remains strong. “It would be a huge blow to our labour-intensive industry,” he said. But the shift in policy to a more flexible exchange rate system was a good thing, he added, because “Chinese exporters have already had to shoulder the burden of other currencies’ depreciation”, a reference to the slump in the value of the euro, the currency of China’s biggest export market.
His message was this: while foreign governments might see the new policy as a passport to a stronger renminbi, China’s export lobby is welcoming it as a way of protecting itself from a weaker euro. Those objectives could easily conflict.
Some of this confusion will spill over into this weekend’s G20 summit. China’s weekend announcement was in large part designed to take the renminbi off the table at the summit and focus attention on what China sees as the principal problem in the global economy – mismanagement in the US. But after unveiling such an opaque policy shift, at the least China will come in for a lot of questions about what its real intentions are.
Beyond that, China’s new policy has not completely ruled out the prospects of a political showdown. The obvious flashpoint is if the euro does weaken substantially again. China’s exporters will expect their currency to depreciate against the dollar, but that would doubtless provoke angry reactions in Washington and elsewhere. The same could happen if China’s trade surplus balloons again in the second half of the year, which is possible if exports continue to recover and imports slow as last year’s massive investment boom cools. Beijing’s diplomatic coup has won it some time, but the underlying dispute has not gone away.
