Was China’s Real RMB Playbook Exposed

Sunday, February 22, 2009 23:44
Posted in category Uncategorized

There are few policy issues more consistent between the United States and China than the valuation of the RMB. It has been the subject of debate within the US congress, and it is clearly an issue that the new administration is concerned with. In fact it was only a couple of weeks ago that Treasury Secretary Geithner said he believed that China was manipulating its currency.

… and when the China Briefing posting of their now hotly debated CBRC/ NDRC meeting notes hit the wires quoting senior level officials seeing the RMB at 6.9~7RMB/ USD, many took notice.

The currency markets and the CBRC both acted swiftly.

Where this story gets hazy, and interesting, is that the CBRC has released a statement that the meeting never happened, and that the report was a “fabrication” while the retraction at China Briefing states that no “official meeting occurred“.

For the purposes of this post though, I want to ask what if…What if a meeting did occur, and that the statement was made to the person(s) who ultimately wrote the post? What if it was not an official meeting, but maybe it was at a round table or at a meeting where all information was supposed to be off the record.

Could the data, even if not obtained “officially”, be real?

Were the Chinese economy to worsen, is that number unrealistic?? and given the recent RMB slide, would investors be wise to treat this number as more likely now than 1 week ago?

I think so, I think it is more likely than not, and I think that is why one party (who was to meet Secretary Clinton to discuss economic policy) distanced themselves from the story as quickly as possible, while the other tried to remove an error in journalistic judgment from the public record.

I guess only time will tell whether or not the meeting occur, the whisper in the ear, and whether or not this controversy exposed the real RMB playbook, but it was only 10 days ago that Luo Ping said

“We hate you guys. Once you start issuing $1 trillion-$2 trillion…we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.

So maybe the Chinese leadership has reached their tipping point? is the 6.9RMB the trade for guaranteed ongoing treasury purchases?

Now, given the firestorm this story created, I would simply like to guide a few questions for comment and advise that any comments outside the scope of the questions will not be approved (i.e. please go to other sites to continue the personal stuff, and please keep it to business here)

1) What is the probability that this 6.9~7.0RMB range is a real range?
2) What is the likelihood that the RMB would move into this range over the next 3-6 months/ 6-12 months?
3) What would be the reaction from US and EU were the RMB to move?

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4 Responses to “Was China’s Real RMB Playbook Exposed”

  1. Damjan says:

    February 22nd, 2009 at 11:58 pm

    Tough to comment on the probability, but I will say that the double bluff situation you are describing is not unprecedented…the most recent example that comes to mind is of reports saying that pre-Olympic visa regulations would be reinstated after mid-October 2008, and that the rumors of a permanent policy change were overblown. Now, well into 2009, the visa situation has not gotten much better.

    Glad you brought this up though, it is a possibility that a lot of seasoned China expats have mentioned after I relayed the particular details of this ongoing saga…

  2. Alex says:

    February 23rd, 2009 at 1:09 am

    1. Don’t know.
    2. Don’t know.
    3. Lots of chest-beating and harsh words.

    What there is a certainty of: that some in the Central Government think a weaker currency would have positive consequences, and that some in the Central Government think a weaker currency would have negative consequences.

    A weakening currency may accelerate capital flight from the economy – reducing nominal capacity, and perhaps real capacity.

    A weakening currency, or anything other than a rock-solid currency, would have negative consequences on the perception of CNY as a reserve in Asia, a perception that has been cultivated by some in the government over the past several months. CNY stepping in against a weakening Asian currency seems to be the way things have progressed recently (e.g. WON), an effect of which means CNY doesn’t appreciate against (some) other currencies.

    Is 6.9 really all that different from 6.8? Your mileage might vary. For speculative capital of course it does. For an investment decision for a factory or other employment/stability generator I’d hope your margins are not that small you think it does. What about levels against EUR, YEN et al – vol on this wipes out much discussion on USD in one decimal place.

    I do find it interesting that factory owners (heavy industry, no real contacts in lighter industry) are mainly saying order books (excluding some areas like ship building which have seen a tad greater problems) are back to 2007 levels. Anaecdotal for sure, but interesting, esp given a different exchange rate than in 2007. Food for thought rather than deep discussion.

    A 6.8 vs. 6.9 discussion is reasonably interesting. What would be more interesting would be the discussion if CNY does move to 6.9 or 7.0 – would it start cantering up from there would be the inevitable next question and perhaps the one to focus on now.

  3. grubby says:

    February 23rd, 2009 at 3:08 am

    Q1: highly likely !
    According to Michael Pettis, China’s Finance Ministry indicates its policy intentions: http://mpettis.com/2009/02/should-china-devalue-the-yuan/
    This argues that “China’s central bank should “actively guide” the yuan’s exchange rate and devalue the currency to about 6.93 against the US dollar. The purpose of depreciating, the report said, was to help maintain economic growth and bolster employment.”

    Q2: much depends on the strategic dialogue with the other “G2” member – ie, the US !
    My take is sooner-rather-than-later, that is, for China.
    This may be nasty for the US.
    But, as you suggest, he who pays the piper calls the tune.

    Q3: If Q2 is credible, any US objections would be sounding-off – the sort of thing that politicians allow each other to do to save face domestically.
    As for the EU, both the UK and the Eurozone, faced with the reality of the G2 (China and the US) as the main powerbrokers, they won’t say anything that could undermine relations with Beijing.

    As a footnote, China may also want to devalue for regional reasons.
    At the tail end of 2008, it announced plans to allow selected regions to settle trade with ASEAN countries in RMB.
    This is a small step – and probably involve small trading volumes as many ASEAN companies will stick with the Dollar reference.
    But Beijing has big plans for the RMB – to establish the Yuan as the region’s currency of choice. http://www.grubbylens.com/rmb-for-the-region/

  4. RMB for the Region | Grubby Lens says:

    February 23rd, 2009 at 3:11 am

    […] After all, the amount of trade involved is just 0.25% of China’s global total. Even if all this switched from Dollars to RMB, there’d be no ripples like the current debate over the RMB’s direction. […]