This is the season when half of Delhi goes in
search of cooler climes with or without their passports,
when half of Mumbai returns to await the monsoons, and when
all of Chennai drips with sweat. It a season when, with
little else to do, reams of imported newsprint are devoured
by “inside” stories of the great Indian filial drama — and
how the mother of all kutty’s became the brother of all
abba’s. It is also the season when I can’t think of anything
to write about, except an article on the Chinese currency.
There are really three questions regarding
the Chinese yuan or the renminbi. First, will it be allowed
to appreciate? Second, by how much? And third, when?
Regarding the first question, the consensus
is that China will allow the renminbi to rise. This is only
partly due to the pressure being put by the US, the European
Union, the G7 and, more recently, the IMF in its May 2005
Article IV consultations. More importantly, it is because
China wants to portray itself a responsible global economic
power — one that carries the Han man’s burden. If capturing
an even greater share of world trade and investments
requires a little bit of give on the exchange rate, then so
be it. Revaluation, therefore, seems to be a given.
Those who matter in China’s economic and
financial policy-making also agree that revaluation requires
de-linking the renminbi from the US dollar and then
anchoring it to a basket of currencies, comprising the US
dollar, the euro and the yen. However, the mega billion
dollar question is by how much. Here, the debate gets murky.
According to what one has heard, the Chinese
advisors are split down the middle. The economic
‘progressives’ argue that anything less than 15 per cent is
insufficient do deal with international market expectations,
and prefer a clean one-shot appreciation in the region of 15
per cent. According to them, a smaller revaluation will
encourage active exchange rate arbitrage. Simply put,
anticipating a second round of appreciation, global as well
as overseas Chinese punters will heavily invest in yuan-backed
financial assets with the expectation of booking
super-normal profits at the time of the next revaluation.
This would be the Chinese version of the jhatka meat
approach — short, sharp, incisive and a once-and-for-all
correction, followed by a calibrated float.
Arrayed against the ‘progressives’ are the
‘conservatives’, who are arguing that neither China’s
financial sector nor it’s exporters can stomach a sharp
shock. In January 1994, China devalued its exchange rate
from 5.8 renminbis per US dollar to a limited float
beginning at 8.7, and then firmly pegged to 8.278 in June
1999. Since then, China has operated on the basis of a
fixed, dollar denominated nominal exchange rate. The
conservatives are saying that China needs time to move to a
full float, and that gradualism is the essence of good
Chinese governance. Therefore, according to this camp, first
appreciate by something like 7.5 per cent to 10 per cent;
then watch, wait and see what this does to exports, banks
and the financial sector; thereafter, if need be, take the
next steps.
It is hellishly difficult to predict what the
final decision will be. But my gut tells me that we will
probably see the triumph of the exchange rate conservatives
over the progressives. So, without betting even a measly
little nickel, I expect an appreciation in the range of
7.5-10 per cent, followed by an strictly managed, highly
interventionist limited float.
Finally, there is the issue of timing. If I
had even the faintest clue about it, I would have been busy
figuring out to make the fortune of my lifetime instead of
typing out this column. The only sense I get is that it will
most likely occur within this calendar year. At that point,
the focus will shift to the RBI. Will it then heave a sigh a
relief and using the breathing space offered by the Chinese,
let the rupee float upwards a bit more? Or will it continue
to intervene to keep the rupee in the Rs.43.50 to Rs.44
band, and allow our exporters to reap some currency
advantage? What do you think?
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