A Policy-Making Mystery in the Renminbi’s Decline
By KEITH BRADSHERAPRIL 25, 2014
HONG KONG — As President Obama visits Asia in a bid to shore up American alliances, he faces an emerging challenge from the region’s behemoth, China, whose currency has experienced a gradual but unrelenting decline over the last 10 days.The fall of the renminbi, which on Friday hit its lowest point since late 2012, is making Chinese exports cheaper in the United States and elsewhere. But the drop is also making it harder for foreign companies to compete in China and other markets where Chinese exporters have a significant presence.
The currency’s weakness helps create jobs and limit unemployment in China — two of the leadership’s stated top goals for the year. But the fall of the currency, which is down 3.3 percent against the dollar since the beginning of this year, also risks hurting employment in other countries and fanning trade tensions.
The Obama administration, like the administration of George W. Bush before it, has long put pressure on China to allow faster appreciation, and it has found itself in an awkward position this spring as the currency has begun to move in the opposite direction. The Treasury Department warned on April 15 that the decline in the renminbi’s value “would raise particularly serious concerns” if it meant that China was continuing to intervene and retreating from its policy of allowing the free market to determine the exchange rate.
A Falling Renminbi As China’s central bank has reduced the midpoint of the trading range, the changes have prompted an exaggerated move in the currency markets.
6.0
renminbi per dollar
Daily spot
close
6.1
6.2
Trading band
midpoint
6.3
Trading band
Scale is inverted to show the falling
value of the renminbi vs. the dollar
6.4
2013
2014
Sources: China's State Administration
The daily trading band doubled as of March 17, 2014, to plus or minus 2 percent.
President Obama and the Treasury have been silent on the Chinese currency during the president’s trip this week. He has already visited Japan and South Korea and plans to make stops in Malaysia and the Philippines.
The big mystery lies in how much of the latest decline in the value of the renminbi reflects policy decisions and how much is the result of market worries about slowing economic growth.
The slide began at the beginning of the year, when the People’s Bank of China, the country’s central bank, unexpectedly began reducing the midpoint for the renminbi’s daily trading range. The bank set off the latest drop when it again began to push the midpoint slightly lower on most of the trading days from April 14 through last Tuesday. On Friday, the rate was 6.25 renminbi to the dollar.
Tiny downward changes in the midpoint caused an exaggerated response in the market. The renminbi fell further and further toward the bottom of the allowable range. Those market declines have continued even as the central bank authorized extremely small daily strengthening of the midpoint on each of the last three days.
“While we believe the initial moves have been guided by policy makers, the depreciation has gotten a life of its own in recent weeks,” said Tao Wang, head of China economic research at UBS.
Yet the recent fall of the renminbi would have been nearly impossible without the acquiescence, and probably the active support, of the Chinese government.
Official figures show that the central bank spent an average of $2 billion each trading day over the 12-month period ending on March 31 to buy foreign currencies and sell renminbi. This prevented the renminbi from rising and, more recently, helped weaken it.
China had almost $3.95 trillion in foreign reserves at the end of March. So the central bank has had the power to halt practically any fall in the renminbi that attracts official disapproval.
Xiao Geng, vice president for research at the Fung Global Institute, a nonpartisan research group in Hong Kong, said he thought the Chinese government was making a mistake in not stopping the fall of the renminbi, because it might erode business confidence if allowed to continue.
“It’s a lot of people trying to move assets out, and they are trying to get U.S. dollars,” he said.
A weaker currency has been welcomed by Chinese exporters.
After stagnating in previous years, the number of overseas buyers at the last week’s Canton Fair, the country’s main trade show for exporters, jumped 10 percent from a year ago. One of the 24,581 exhibitors at the vast exhibition this year, Yan Xiaowei, said the fall of the renminbi had contributed to a spate of requests from interested foreign buyers for price quotes.
Mr. Yan, the general manager of Yunfu Citistone Manufactory, a maker of decorative tiles and wash basins located in Yunfu, a city in southern China’s Guangdong province, said he had resisted cutting prices even as each dollar in export revenue covered more renminbi of his costs.
“The depreciation has helped our bottom line, and with our increased profits, we have been able to stock a better selection of stones,” he said in a telephone interview on Friday.
But China is facing persistent concerns about its broader economy.
The Hong Kong stock market dropped 1.5 percent on Friday, and an index of the Shanghai and Shenzhen markets fell 1 percent on worries about the Chinese economy. Year-over-year growth slowed to 7.4 percent in the first quarter, according to official figures, and many economists and business executives say actual growth may be much weaker.
Housing starts and the number of real estate transactions have dropped as buyers hold out for lower prices after a construction boom. But only a few real estate developers have been willing to brave the wrath of earlier purchasers and cut prices for unsold units in apartment towers.
Officially recorded unemployment edged down to 4.08 percent in the first quarter from 4.1 percent at the end of 2013, the labor ministry announced on Friday. But actual unemployment is considerably higher, particularly among recent college graduates, who have struggled to find work in an economy that still emphasizes blue-collar sectors like manufacturing and construction.
The economic picture has raised worries that China may reverse course on its overhaul efforts in order to stimulate growth. But officials, at least publicly, have expressed their commitment to economic change.
“Exchange rate reform will continue,” Yi Gang, a deputy governor of the country’s central bank, said at an International Monetary Fund meeting on April 12. That seemed to be a reference partly to China’s gradual widening of the trading band in recent years, including again last month. But he did not address the value of the renminbi, and central bank officials could not be reached for comment on Friday. |
