A Crack in China's Great Wall

By Brad Zigler

The currency dodged a bullet in July, going into the month worth 14.59 U.S. cents, peaking at 14.70, then sliding into August at 14.66.

The renminbi dipped to 14.57 cents on August 19.

 

Chinese Yuan Renminbi Vs. U.S. Dollar (July '05 - August '08)

 

Whether this is just a "bump in the road," as some think, or a symptom of capitulation to inflation, remains to be seen. China's growth, of course, has been a driver of the global commodities boom. Weakening Chinese demand loosens a big peg in the commodity cycle's underpinnings.

Let's take a quick tally of the damage.

The Chinese producer price index hit 10% in July, its twelfth consecutive monthly rise, to attain a level not seen in a dozen years. Rising energy and commodity prices have ratcheted up costs in the Chinese supply chain so much that analysts are now jawboning a 2% decline in the GDP growth rate from the 10% level clocked in the first half of the year. (China's not alone in that. GDP growth in that other engine of demand, India, declined to 8% at last look).

The inflow of dollars into Chinese coffers is also slowing. According to the most recent government statistics, China's trade surplus totaled $123.7 billion in the first seven months of 2008, a 9% drop from year-ago levels.

No doubt, China's still growing, but its resolve on the inflation-fighting front is now being tested. A stronger renminbi would certainly help to hem in the inflationary beast. In this dollar-resurgent world, however, that will be more difficult than it once was.

Comments

[Think-About-It:]

Thanks for the chart.

2008 Aug 29 02:20 PM

[huangjin:]

If a nation with a currency peg overvalues their currency, they will go broke and be forced to revalue. If a nation with a currency peg undervalues their currency, the peg will eventually become the natural exchange rate.

2008 Aug 29 03:22 PM

[James Lewis:]

Huangjin, you are certainly correct of the effect of an undervalued currency when you look at Hong Kong; where the HKD has become the natural exchange rate and everything has priced itself accordingly.

However the Chinese Economy is vastly bigger and the export ratio is vastly bigger as well. So this presents a very different picture and cause and effect realtionship.

Also we must not forget that undervalued currency breeds interest from de-stabilising trading strategies to take the peg out and profit from a return to equilibium.

In China's terms the undervalued dynamic peg has caused major structural imbalances in the economy and also the wage/income differential between its people.

Which is made more complicated by the fact that there are pockets where the dynamic peg has become the natural exchange rate and caused a revaluing in the prices of a lot of goods domestically.

The two points are the reason why the CCP are having so much difficulty predicting the outcome of revalution. Of course the positive side of the Yuan devaluing domestically due to monetary inflation is that it actually stimulates an artifical strengthening against international currencies without the price moving.

i.e. you print lots of yuan at home (to keep currency undervalued), it is worth less on the international market in real terms.

It is for this reason it is actually very hard to calculate the true equilibrium price.

2008 Aug 31 07:11 AM