Renminbi flexibility to be enhanced

The People's Bank of China announced on Saturday that it was making the renminbi more flexible.

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

There were no details about how much the renminbi will be allowed to moved. A Bloomberg report today suggests that even by the end of the year, it is likely to be limited.

The yuan’s appreciation may be limited to 1.9 percent against the dollar this year as the euro’s slump hurts exporters, a survey of economists showed after China signaled an end to a two-year peg.

The currency will climb to 6.7 per dollar by Dec. 31, according to the median estimate of 14 analysts interviewed after the People’s Bank of China said on June 19 it will allow greater “flexibility.” The central bank yesterday ruled out “large changes” in the exchange rate and said it will prevent “excessive” moves.

And while most analysts assume that the renminbi will appreciate, some are not so sure.

“We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang, Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the Group of 20 summit in Toronto on June 26-27.

Reuters also cites Nouriel Roubini and Li Daokui as saying that the renminbi could depreciate.

If the euro were to continue to depreciate, "the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome," Roubini said...

Li Daokui, an academic adviser to the monetary policy committee of the People's Bank of China, told Reuters in Beijing that the yuan could depreciate against the dollar if the euro falls sharply against the U.S. currency.

As Robert Wenzel points out, the move could also have an impact on China's demand for US Treasuries, although I think the impact would depend mainly on how much the renminbi is allowed to appreciate.