International | Aug 04 2006
By Terry Hughes
The consensus that appears to be emerging from a 5-day meeting of 100 top Chinese policy officials is that there is a need to let the renminbi appreciate faster, HSBC economist Hongbin Qu says.
The apparent concern has come about due to higher than expected GDP growth figures and urban fixed asset investment data, despite the government’s efforts to keep a lid on investment growth through credit tightening and administrative controls. After trying and apparently not succeeding with these policies for over two years, policy makers are now looking at their options, and allowing the renminbi some more flexibility seems to be the most favoured solution.
Among the possibilities being looked at are a widening of the current trading band as well as allowing increased daily volatility, HSBC adds. However, don’t expect any rapid changes as a recent survey of Chinese economists showed the currency was not forecast to appreciate by more than 3% this year.
Unless there is a drastic shift in policy, Lehman Brothers shares the view that the renminbi is only likely to appreciate modestly, although it says that with the capital account now "defacto" open, unless greater renminbi flexibility is permitted monetary policy will remain constrained.
Supporting this view is the argument that the government is finding it difficult to raise rates as if it did, capital inflows would increase, thus defeating the original objective. China’s interest rates are too low at 5.85% given the 14% nominal growth rate, Lehman Brothers says. Its suggested solution, given concerns a stronger currency and higher rates would hurt the rural sector, would be a more expansionary fiscal policy, raising living standards, improving social welfare and cleaning up the environment.
This would help reduce precautionary spending and raise consumption, Lehman Brothers argues, however, it sees "no signs of a major fiscal expansion."
