Jay, Will the same bet look any smarter in 2005?
After having one pizza written off, the Iraqi one I just lost another Dec 31st since Renminbi was not revalued.
The renminbi
Published: January 2 2005 17:04 | Last updated: January 2 2005 17:04
The smart money turned out to be simply hot. The much-anticipated renminbi revaluation failed to materialise, despite a reported $70bn inflow of speculative funds in the first half of 2004. Will the same bet look any smarter in 2005?
Monetary policy is almost entirely a domestic issue: international demands cut little ice. For Beijing, a more flexible exchange rate is not a pressing issue. Inflationary pressure, such as it was, has cooled following the October interest rate increase and better harvests since much of the increase in headline inflation came from food prices. Going forward, a vast pool of labour and manufacturing overcapacity serves as a structural deflationary force.
Beijing's primary concern remains the same: to keep economic growth high enough and volatility low enough to create the necessary 20m-25m jobs a year needed to maintain social stability. The question is at what point holding on to the exchange rate will itself threaten stability.
So far, China has pulled off the trick of combining a fixed exchange rate and independent monetary policy thanks to its capital controls. But as more holes are punched in these, both by China's own liberalisation measures and by active unofficial markets, sustaining this juggling act grows harder.
Once the cracks appear, currency flexibility is clearly preferable to importing US monetary policy. Here too, China faces challenges. Beijing is likely to opt for a modest appreciation, perhaps re-pegging the renminbi to a basket of currencies. Assuming a trade-weighted basket, the focus will still be firmly on the dollar with most of Asia either directly pegged or shadowing the greenback. Any strengthening will attract still more hot money.
Speculators, however, should learn from this year: China has both the determination and the firepower to draw the line in the sand. It spent around $15bn a month doing so last year, and has more than enough funds to repeat the exercise this year too. |
