Revaluing the Renminbi

Businessworld

Jehangir S. Pocha

Just days after China and the US ended their ‘Strategic Economic Dialog’ in mid-December, Beijing thumbed its nose at Washington by refusing to revalue the renminbi. The face-off is being closely watched by central bankers as any appreciation in the renminbi is almost certain to trigger ‘sympathetic’ changes in Asian currencies, including the rupee.

During the dialogue, which will now take place bi-annually, Henry Paulson, the US secretary of the treasury, and Ben Bernanke, chairman, US Federal Reserves, both called for an appreciation in the renminbi to rein in China’s runaway $200-billion trade surplus with the US.


But China demurred, mainly because the Communist Party, whose legitimacy is almost solely based on economic success these days, cannot afford to financially hurt its two prime constituents — workers and peasants. Beijing worries that a dearer renminbi would create a ‘twin trap’ by upsetting farmers by bringing in cheap American agricultural imports and hitting urban workers by lowering Chinese exports.

China’s economic czar, Ma Kai, the head of the all-powerful National Development and Reform Commission, has also repeatedly stated that China’s economic infrastructure, banking system and capital markets are woefully ill-equipped to deal with even baby steps towards freely floating the renminbi, which many analysts say revaluation would be.


Yet, markets seem to feel an upward revision in the renminbi is inevitable and over the last month foreign money has been flowing into China in anticipation of this happening sometime in 2007.

To quell rising uncertainty, Zhou Xiaochuan, the governor of the People’s Bank of China, the central bank, says top European and US bankers are advising the government on how to reform its financial sector — in increments. “This is a gradual process and I have already received some positive feedback from my foreign colleagues,” Zhou recently said. “The central bank chiefs of some countries have started to ask me whether to put a portion of their reserves’ assets in yuan.”