International | Apr 19 2006
George Bush is meeting this week with Chinese President Hu Jintao, with the value of China’s Yuan sure to be a point of discussion during the talks given the efforts by the US to pressure China into revaluing its currency.
On most estimates, the Chinese is currency is undervalued, the exchange rate controls helping it maintain this position to the benefit of China’s balance of trade, as its cheaper currency makes its exports more attractive.
At the same time China recently overtook Japan in terms of its holdings of foreign reserves, its total of US$875.1bn giving further ammunition to attempts to force China into freeing up its current capital controls.
The first steps towards this have been made, with China last week announcing it would now allow individuals to take US$20,000 annually out of China, up from US$8,000 previously.
Chinese banks will also be allowed to convert domestic deposits into foreign currency and use the funds to purchase foreign fixed interest securities, giving the banks some experience in foreign investment. Both steps are seen as important transitions along the way to both a more freely traded currency and a free capital account, but the impact of the moves may actually turn out to be very different from what is currently being sought by the US.
Bank of America analysts in China suggest the moves are likely to reduce the pressure on the Yuan to appreciate, while market commentator Dennis Gartman suggests the changes are in fact very bearish for the Chinese currency.
He suggests the moves will now give Chinese citizens an improved ability to transfer money offshore, something that was far more difficult under the old restrictions. This is likely to see an increase in the outflows of the Yuan, which suggests additional downward pressure on the currency.
While such an outcome might be bullish for China’s economic growth as it should ensure its export performance remains strong, it is the opposite effect to what the US is trying to achieve, as it wants a stronger Chinese currency to take some pressure of its growing trade deficit.
It sets the stage for some interesting talks between the two leaders this week.
