Beijing remains divided over currency peg

Beijing remains divided over currency peg
By Geoff Dyer and Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: March 8 2010 14:55 | Last updated: March 8 2010 14:55
http://www.ft.com/cms/s/0/3d2356fc-2aaf-11df-b7d7-00144feabdc0.html?nclick_check=1


China’s National People’s Congress is usually a platform for the leadership to drive home a handful of key economic messages for the year. On the issue of China’s controversial currency policy, however, this year’s session of the legislature has demonstrated instead the divisions within the government that still remain.

Zhou Xiaochuan, governor of the People’s Bank of China, used an appearance at the NPC to give the clearest indication in months that Beijing is preparing to abandon the peg to the US dollar it informally introduced in mid-2008.

Mr Zhou told a press conference that the currency peg was a “special measure” introduced to help China weather the financial crisis. “These kinds of policies sooner or later will be withdrawn,” he said.

After several months of tough talk from Beijing about not giving in to foreign pressure amid accusations that its currency is undervalued, his comments were a significant shift in official rhetoric.

”This is the most explicit comment on the renminbi’s exit from current de-facto peg made publicly by top Chinese policymakers so far,” said Qu Hongbin, chief economist for China at HSBC.

Yet Mr Zhou’s tone was not shared by other senior officials. Chen Deming, the commerce minister whose department has close ties to China’s export sector, said at the weekend that it would be another two or three years before exports fully recovered to their pre-crisis levels. He told Reuters on Monday that any shift in currency policy would only be “gradual and controlled”.

In his speech on Friday, Wen Jiabao, premier, said only that the currency would remain “basically stable”, the phrase he has used for months and a sharp contrast to his pre-crisis pledge at the NPC in 2008 to increase the flexibility of currency policy.

When the offshore market that trades the Chinese currency opened on Monday, there was a flurry of activity as investors initially speculated about a prompt appreciation in the renminbi as a result of Mr Zhou’s comments.

However, as economists digested the comments, some began to wonder if Mr Zhou was not subtly suggesting any shift in policy might still be some time coming. “I wonder whether this is his way of asking for more time,” said one foreign exchange analyst.

Although Mr Zhou said that the 18 month-old peg to the dollar was a “special” policy for the crisis period, he also emphasised that the Group of 20 summit in Pittsburgh last autumn had cautioned against “premature withdrawal of stimulus policies”, which could be a hint that the timing of a change in China’s currency policy might not be until the US starts to raise interest rates.

“We think that Zhou’s comments support our call that the move might come later rather than sooner,” said Callum Henderson, head of FX Research at Standard Chartered Bank in a note. “We think the renminbi will be de-pegged as part of major economies’ overall ‘exit strategy’ from extraordinary and unconventional monetary policy.”

A former senior Chinese official said that the government was concerned about the consequences of making a move on its exchange rate before other countries unwind their stimulus policies.

Wu Xiaoling, a former deputy governor of China’s central bank, said that on the one hand, Beijing may need to raise interest rates or appreciate the currency to meet its target of keeping inflation below 3 per cent this year. However, the government was very wary of large inflows of speculative capital taking advantage of higher interest rates or using more flexibility in its currency policy to bet on further renminbi appreciation.

“No other country’s economy is doing as well as China’s, and this puts the government in a very difficult position,” she said.

CURRENCY RANTS

Wen Jiabao,
Chinese leader:
‘We will not yield to any pressure of any form forcing us to appreciate’
December 26 2009

‘We will continue to improve the mechanism for setting the renminbi exchange rate and keep it basically stable at an appropriate and balanced level’
March 5 2010


Tim Geithner,
US Treasury chief
‘President Obama . . . believes that China is manipulating its currency’
January 22 2009, prior to being confirmed in post

‘They understand they need to do it [move to a more flexible exchange rate]. I think they want to do it, and I’m actually quite confident that they will do it’
November 20 2009