macroblog: Renminbi Revaluation: How Much Effect?

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Renminbi Revaluation: How Much Effect?

Not much, suggest at least a couple of important policymakers. From today's Wall Street Journal (page A13 in the print edition):

Chinese central bank chief Zhou Xiaochuan warned that mounting political pressure on Beijing to revalue its currency, and overblown expectations about how such a move may help correct imbalances in the world economy, are making it more difficult for China to take action...

Mr. Greenspan acknowledged that a stronger yuan doesn't mean the overall U.S. deficit will shrink much, because U.S. importers simply would turn to other countries offering inexpensive goods. He said a stronger yuan may help reduce the U.S. trade deficit with China. He also argued that Chinese intervention in currency markets to keep the yuan from rising couldn't continue indefinitely. A more flexible currency "is very much to the advantage of China," he said.

A related opinion appears in this month's edition of the Cleveland Fed's Economic Trends:

A renminbi revaluation seems an eventual certainty, but betting on how it might affect trade is still risky. Trade depends on the real, or inflation-adjusted, exchange rate. A change in the peg will certainly affect the real rate for a while, but few economists expect it to have a lasting effect on the real exchange rate.

The article (which appears on page 9) updates a picture that appeared in an earlier post:

How far is the renminbi likely to fall?  The Trends article includes this:

Forward exchange rates often reveal the market’s best guess about a currency’s future path, but no forward renminbi market exists because  China restricts such trading. Recently, a market in nondeliverable forwards (NDFs) has arisen to provide cover for companies trading in renminbi. An NDF contract sets an exchange rate for the future purchase or sale of renminbi. But unlike a standard forward contract, delivery on an NDF is made not in renminbi, but in an equivalent amount of a convertible currency, such as U.S. dollars.

Forward rates on renminbi NDFs have been below Rmb 8.28 per dollar since mid-2002, suggesting that the market expects a renminbi appreciation. Recently, NDFs generally have fallen to new lows.

Here's the picture:

By my calculation, that looks like the neighborhood of 6-1/2 percent.

UPDATE:  I was reminded by a colleague -- they are all well-practiced in correcting me -- that futures/forward rates are not unbiased predictors of future spot rates:  The general direction is more informative than an exact number.  You can find a reader-friendly article on the topic of futures-prices-as-predictors here.

June 08, 2005 in Asia, Exchange Rates and the Dollar | Permalink