International | Jul 27 2006
By Chris Shaw
The recent release of economic growth figures showing the Chinese economy continues to expand even faster than the most optimistic forecasts in the market had expected has put renewed pressure on the People’s Bank of China to revalue the currency, but DBS suggests another old source of pressure also appears set to re-emerge.
The bank is referring to the US, and in particular the proposed bill by Senators Schumer and Graham to impose tariffs of 27.5% on Chinese exports if a revaluation isn’t made by the end of September. While DBS notes the bill remains unlikely to be passed by a vote in the Senate, there is some talk it is at least becoming a more popular policy option as the US attempts to deal with its fiscal imbalance.
As DBS points out, there is evidence the US government is enjoying some success in improving its financial situation, with the next budget deficit figure expected to show a narrowing of the deficit. The deficit is of course being driven in large part by China’s ongoing trade surplus with the US, leading the bank to argue if the US wants to be seen as serious about improving its finances it must address the trade balance issue, which means additional pressure on China to revalue its currency.
Of course, the internal pressure on a revaluation is also increasing as the speed of China’s economic growth continues to rise. DBS suggests a continuation of the support for the current exchange rate will force domestic interest rates higher, which will then see greater inflows of capital attracted by the higher rates on offer. This means the Chinese would be facing pressure for a revaluation of the currency from both internal and external forces, which would only add to the argument for an increase in the value of the currency.
DBS estimates while the renminbi to date this year has increased by just 1.1% against the US dollar, it expects by the end of the year there should have been a total adjustment of about 4%. This implies an exchange rate of 7.76 to the greenback.
