The renminbi

Published: January 27 2010 09:21 | Last updated: January 27 2010 16:32

Put yourself in Chinese premier Wen Jiabao’s shoes. The rest of the world seems united: your currency is too cheap. For the past year or so, speculative capital has piled in to China on the expectation that the gradual appreciation suspended in July 2008 will be resumed. This hot money, driving up domestic asset prices, is disturbing enough. But given that every foreign government minister you bump into this year will be banging on about “imbalances”, a trade surplus approaching $150bn and reserves nudging $2,400bn, it probably makes it imperative for you, as head of the body with the final say over exchange rate policy, to do something. But when?

First, you might consult your diary. In mid-March, there’s the annual session of the National People’s Congress. That would seem an ideal time to confirm to domestic audiences that the economy is firing on all cylinders, and so the subsidy to exporters – the weak currency – can start to be removed. But it is also uncomfortably close to President Hu Jintao’s state visit to Washington in April. Presenting a new currency regime to the likes of Dominique Strauss-Kahn of the International Monetary Fund, who has wasted few opportunities to decry an “undervalued” renminbi in recent years, may stick in the craw. If there’s one thing the Politburo hates, it’s being seen to bow to external pressure.

Second, you might reflect that policymaking in China – freed from the tedious strictures of an electoral cycle, or even a set calendar of central bank meetings – can be timed for maximum impact. The recent one-two punch of a rise in the reserve requirement ratio, followed by a reinstallation of loan quotas for certain lenders, was a classic of the genre.

The conventional wisdom, expressed through thinly-traded renminbi forwards, suggests a modest appreciation beginning in the second half this year. But bearing these two factors in mind, there is a case for a move much sooner. The two-week lull between Davos and the Chinese New Year could be an opportunity too attractive to pass up.

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