2010-03-17

One-off revaluation bad for China—Ha Jiming

China and Japan: A Comparison that Falls Flat
China's situation is much different. China has flexibility in its exchange rate policy and has never promised western countries that it would let the yuan drastically appreciate. As a result, we can effectively adopt a "cocktail therapy" policy for China's yuan exchange rate. So as the yuan gradually appreciates in small increments, interest rates also will be correspondingly increased. China's current low interest rates give the central bank sufficient room to do this.

A one-off, sharp appreciation of the yuan would harm the real economy and put the country on the same path that Japan once walked. Moreover, any substantial appreciation of the yuan without a corresponding rise in interest rates would cause a significant amount of hot money to flow into the country.

Matching a rise in interest rates with an appreciating yuan would achieve more comprehensive policy results. An appreciation of the yuan would inevitably be beneficial to the stock market, especially real estate and aviation stocks. Higher interest rates at this point would to a certain extent cool any overheating in the stock and real estate markets, and prevent an asset bubble.

This kind of policy action also would be beneficial for popping the bubble in international commodity prices. China's tight monetary policy started a domino effect in global markets. Each time this year that China's central authorities raised the required reserve ratio for banks, international prices for major commodities such as oil and copper immediately fell to varying degrees.
While he's right that China's tight monetary policy caused the markets to crash, the chart of oil and RMB appreciation suggests that it was the appreciation that may have triggered the blow-off stage of the bubble to begin with.


Another article on yuan revaluation ends with these two paragraphs:
Cost-Sharing for Appreciation of the Yuan
Also worth considering are the after-effects of 2005 exchange rate reform. Some think small fluctuations and mechanisms that accompanied that appreciation trend initiated market expectations of a consistent appreciation of the yuan, leading to a large inflow of speculative capital.

"Implementing policies to prevent an asset price bubble when the yuan appreciates is beneficial for realizing a shift in the mode of economic development and controlling inflation," said Ha Jiming, Chief Economist at China International Capital Corp. Ltd. "Just as these policies can prevent an asset price bubble from forming, they can also avoid attracting more hot money."
Which is exactly the argument I made earlier today: If the renminbi goes up, then what happens?

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