RMB Politics: Just Enough for Congress?

Beijing’s currency regime will come under the spotlight tomorrow in Washington as tempers (and political posturing) are rising alongside the trade deficit with China.  In the first eight months of 2010, China’s trade surplus with the U.S. rose 29% y/y to US$115 billion while its overall trade surplus shrank 16% to US$104 billion, according to the Chinese data. [Though, as Michael Pettis points out in a recent blog post, there are problems with using bilateral trade data to estimate imbalances.]

Rebalancing With Everyone but the U.S. (USD mn, trailing 12m sums)

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Source: General Administration of Customs

Well, lo and behold! In the two days before the House Ways and Means Committee hearings, the RMB appreciated 0.4% (based on the daily fixing rate), bringing the total appreciation against the USD to 1.3% since the new “flexible” regime was announced on June 19. A similar increase just ahead of the G20 meeting in June was enough to take the RMB off the agenda, and Beijing may be thinking it can pull off the same trick twice.

RMB Resurgent

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Source: China Foreign Exchange Trading Center

China’s August data indicated stronger-than-expected growth, which may partially explain the resurgent RMB, but politics still matter. This week international pressure seems to be driving the RMB fixing rate, but next week domestic politics probably will trump again. In that case, the current RMB rally could soon peter out, just like the previous one.  Perhaps the more important question for the moment is whether Japan will cave to the pressure from China’s recent Yen purchases and intervene further to weaken its currency.


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