China Overdose: PBoC Hints at Refloating Yuan

OK, this Sinocentric focus is getting a bit too much even for my tastes. (The fine fellow working next to me, BTW, is from the PRC foreign ministry. The LSE is, if nothing else, the real deal.) However, since keeping IPE Zone readers better informed than your average blog reader is one of my goals--ignorance and stupidity always gnaw--I thought I should relay the following news. US administration officials has been making noises about asking China to follow "currency flexibility"--official speak for letting the renminbi or yuan revalue. Since June of 2008 to the present time, the PRC has maintained its currency at the $1/6.83 yuan level. (Clink on above chart for larger image.) This, of course, contradicts China's stated adoption of a "managed float" in July of 2005 from a hard peg. Take a trip down memory lane and view this blog post by Cynic's Delight.

What exactly is a "managed float"? An old IMF description says "a managed float, in which a country’s monetary officials will occasionally intervene in international currency markets to buy or sell its currency to influence short-term exchange rates." That sounds about right, although some "managed" or "dirty" floats are less subject to official machinations than others. In China's case, I think it's "we let it revalue somewhat when political pressure is being applied by foreign devils but re-peg it when the pressure's off." Now is the time when the Yanks are bellyaching once again, so what you see is what you may get. From the Times of London:

China moved yesterday to head off a currency row with President Obama by hinting that it would allow the renminbi to rise after keeping the exchange rate on ice for 16 months. Mr Obama has said that he would raise the issue of the Chinese currency, widely seen as undervalued, when he visits Beijing next week. The cheapness of the renminbi is one reason that Washington has slapped duties recently on steel, tyres and other Chinese imports.

The People’s Bank of China, the central bank, did not say explicitly that it would allow the renminbi to start to climb again — but conspicuously it omitted to repeat its well-worn language on the subject, which in Beijing’s opaque system can be interpreted as equivalent to a policy change.

In its third-quarter monetary policy report, the central bank departed from its mantra of keeping the yuan “basically stable at a reasonable and balanced level”, which it has repeated at every opportunity for more than a year. Instead, it hinted at a shift from an effective dollar peg that has been in place since July 2008, pinning the currency at about 6.83 yuan to the dollar.

Some traders are voicing doubts, however:

Yet not everybody was convinced that yesterday’s statement foreshadowed an imminent policy shift. Peng Wensheng, of Barclays Capital, said: “I think it probably reflects increasing capital inflow pressure on the currency. But I think it is unlikely they will make any move in the near term. The language is somewhat different from before, that’s true.” He was unsure that a change was around the corner, even with Mr Obama due in town. “Usually, when they say something and when they do something — the timing is uncertain, I should say.

Note that the foreign exchange markets are pricing in further revaluation in non-deliverable forwards (NDFs). Since the yuan is not freely traded, NDFs are the means by which traders bet on the yuan's direction without actual delivery of renminbi on the maturity date. Trust me. Unlike a certain financial yellow journalist, I actually know a thing or two about this. Anyway, from Alibaba:

The yuan rose slightly against the dollar in benchmark offshore one-year non-deliverable forwards (NDFs) on Thursday as the overseas market expected the yuan may appreciate after the Chinese central bank said it will consider major currencies in guiding the yuan, dealers said.

In a departure from past language, the central bank said on Wednesday it would improve the yuan exchange rate mechanism based on changes in capital flows and fluctuations in the values of major currencies when guiding the value of the yuan. "The wording change in the central bank's report hints that the central bank will allow the yuan to appreciate sooner or later," said a dealer at an Asian bank in Shanghai. "So, that has guided the overseas market's increased expectations for yuan appreciation."

Offshore, benchmark one-year dollar/yuan NDFs hit 3-week lows at 6.5850 bid on Thursday compared with Wednesday's close of 6.6075. Twelve-month yuan appreciation implied by NDFs, which moves inversely with the forwards, rose slightly to 3.67 percent measured from the Chinese central bank's daily mid-point, compared with 3.32 percent implied at Wednesday's close.

We'll see...