Thursday, July 21, 2005
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The beginning of the end of Bretton Woods 2?
China's central bank posted the following announcement on its web site today:
What does this mean? In the short run, not much -- China is effectively appreciating its currency by only two percent and widening its band a bit. More interesting will be whether this initial move puts pressure on China to either revalue more or let its band widen more in the future. The statement implies that the Central Bank could do this, but my hunch, and the press coverage of the announcement, leads me to believe they'll sit on 8.11 for some time.
In the medium run, the decision to move from a fixed exchange rate of a managed float is going roil the currency markets a bit -- see this Bloomberg report on the yen, for example. More interestingly, Malaysia has followed China's lead and has decided to move the ringgit from a strict dollar peg to a managed float as well. The really intriguing question is how much this move will retard public and private purchases of dollar-denominate assets. This Associated Press report suggests that other Asian central banks are taking this in stride.
For the U.S., I'm not sure a two pecent revaluation is going to affect trade one way or the other. The rule of thumb has been that a ten percent revaluation would lower the trade deficit by one percent, so this won't have that big of an effect on the trade balance (and I would wager that the J-curve effect with such a small revaluation will be longer-lasting). The bigger effect may be political, in that this could eases protectionist pressures in Congress. On the other hand, it could also convince yahoos like Senator Schumer that this is the way to pressure the Chinese into making foreign economic policy concessions.
On the other hand, if Xu Haihui's report for International Finance News -- reprinted in the Financial Times -- is true, then the effect on certain sectors of China's economy could be significant:
UPDATE: For nice backgrounders on the issue, see this Wall Street Journal report by Michael Phillips (the link should work for everyone), this Financial Times renminbi page, and this backgrounder on China's slowing economy in the Economist.
ANOTHER UPDATE: Brad Setser weighs in: "Too small in my view to have much of an economic impact, in any way. On trade flows. Or on capital flows. I would still bet on a further revaluation." Nouriel Roubini and David Altig are debating the implications of the move on the Wall Street Journal's Econoblog.posted by Dan on 07.21.05 at 10:31 AM
It's all Bush's fault, the sky is falling.posted by: bort on 07.21.05 at 10:31 AM [permalink]
Sorry about that, I meant to say BushCo's fault.posted by: bort on 07.21.05 at 10:31 AM [permalink]
Wait a minute... Devaluing the RMB will not have a significant effect on trade with the US, but it will devastate sectors of China's economy? Well, which is it?
As with most politicized arguments, the truth is NEITHER. The Chinese are not giving us any gifts with this change in policy. They merely recognize the reality that holding their currency artifically low effectively subsidizes US consumers. It was useful for them for a time to get a foothold in US markets, but now its time to gradually move to slightly freer trade.posted by: Larry on 07.21.05 at 10:31 AM [permalink]
I'm not sure that i'm reading the China's central bank's announcement correctly, but there appears to be a much larger potential for appreciation. As I read it, the band of 0.3% is not going to be set around 8.11, but will be reset every day around that day's close. So, potentially, yuan per dollar value can drop by 0.15% a day until these rules are changed. Am I reading this incorrectly?posted by: greg on 07.21.05 at 10:31 AM [permalink]
i meant to say that yuan per dollar value can drop by 0.3% a day, not 0.15%.posted by: greg on 07.21.05 at 10:31 AM [permalink]
Greg, I think you were right the first time. I think a .3% band means +/- .15%. We'll see what the Chinese do if they see a .15% drop every day for several days.posted by: Larry on 07.21.05 at 10:31 AM [permalink]
dan -- the 10% rule of thumb is for the broad dollar. China is maybe 15% of the index. 2% or even more v. 15% is not much -- but China's move probably augers a broader move in a range of asian currencies.posted by: brad on 07.21.05 at 10:31 AM [permalink]
Drew Brick,Jun Yuan - MS - 21/04/2005
Two, the lack of transparency in PRC legal, business and political codes will not stop those whom do not care for the transfer of dual use technology esp where it is clear in terms of national security:
Love that last part from the FT article, with the sop to foreign competitors in the garment industry. Right, that's what's going to happen!posted by: Bob on 07.21.05 at 10:31 AM [permalink]
And then there is this:
I do not see a conundrum at all. Every time the Fed raises short term rates, the long term rates flatten: Not a conundrum.
Written by Stormy on 2005-07-24 00:16:41, Brad Setser's web log.
----posted by: Movie Guy on 07.21.05 at 10:31 AM [permalink]
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