Whether the renminbi can withstand international pressure

With Barack Obama's first official visit to China, the fate of the renminbi has again become the focus of the international monetary market.　　Since the Chinese central bank changed the wording of a key monetary policy statement last week, the market has been speculating about whether and when the Chinese government will allow the renminbi to appreciate. The change in wording is significant because the Chinese government, which tightly controls the value of the renminbi, has maintained exchange rate stability since last summer.　　The effect of the wording change is also immediate: over the past few days, expectations of a revaluation of the renminbi against the dollar have risen to its highest level in a year, with the renminbi expected to rise 3.4% against the dollar over the next 12 months.　　The central bank's third-quarter monetary policy executive report deletes a promise to keep the renminbi "basically stable" and adds that the change in the renminbi's exchange rate will take into account major currency movements, not just the dollar.　　The central bank's report sparked intense speculation that the country's currency policy would shift as the U.S. president's visit to China, and Obama promised to raise the currency before leaving. International calls to revalue the renminbi have also increased.　　The International Monetary Fund (IMF) is particularly vocal, but many other countries have echoed it, including some in Asia.　　IMF chief Dominique Strauss-Kahn said yesterday that a stronger renminbi was part of the reforms necessary to boost domestic consumption and push China's economy out of export dependence. "Currency appreciation is an important part of the necessary reform package," he said. "Allowing appreciation of the renminbi and other Asian currencies will help increase the purchasing power of households, increase the proportion of labor income and provide the right incentives to readjust investment." "China's economic data has improved since the big stimulus package was implemented in the past year."　　Recent figures show China is expected to surpass its 8% growth target in the fourth quarter, but they also show a record increase in the money supply, meaning inflationary pressures are rising. "The question is when the action taken so far will have a certain degree of impact on the economy, prompting China's economic policy to shift from supporting economic growth to easing the build-up of inflationary pressures," said Derrick Helpani of the Bank of Tokyo-Mitsubishi UFJ.　　He added that data from China's money supply suggest that inflationary pressures will rise again in 2010, and may thus prompt China to return to a gradual revaluation of the renminbi between July 2005 and June 2008.　　But halpenny that such a policy might attract a new round of capital inflows. Another option would be a one-off substantial revaluation of the renminbi, which might reduce speculation about further appreciation of the renminbi and curb speculative capital inflows.　　But few analysts predict that China will take such a bold step.　　At this stage, they say, a revaluation of the renminbi could undermine the fragile recovery trend, not just in China but also in the US. While China is fully capable of achieving the 8% per cent growth target, the composition of growth is less heartening. China's economicHalf of growth is driven by government fiscal stimulus rather than private-sector demand, and the export rebound has made a big contribution. "The shift from a supply-driven economy to a demand-driven economy will still take some time, with sustained government support, so it seems unlikely that China is now willing to put its export-contributing growth at risk of currency appreciation," said Hans Retic of BNP Paribas.　　In addition, he said, the US is now asking the renminbi to appreciate less than it should, given the likely negative impact on the US bond market of a slowing growth in China's foreign exchange reserves. China has accumulated 2.273 trillion of dollars in foreign exchange reserves. Most of them are invested in US Treasuries, so they have control over the yield on US Treasuries.　　A disruption to China's foreign-exchange reserves could raise yields on US Treasuries, threatening the US economy's recovery. "The shrinking of China's foreign exchange reserves could lead to a reversal of the dollar against the euro, which would have a major impact on a range of markets from commodities to credit," said Bill Onier, a portfolio strategist at Merrill Lynch Wealth Management Inc., Europe, Middle East and Africa. We don't think China will take any action before the end of the year, but even the hint of monetary policy adjustments may be enough to cut the momentum of the recovery, forcing the dollar to depreciate and cyclical assets to rise.　　"On one thing, observers seem to agree that the renminbi is unlikely to change during Mr Obama's visit." "We don't think there will be a major breakthrough," says Michael Hart of Citigroup. "China is not willing to succumb to foreign pressure. "(excerpted from November 18 ft)