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Last week China economy review and analysis (April 14, 2010)

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

Treasury Secretary Geithner visited Beijing for a private meeting with Vice Premier Wang, who will lead the Chinese delegation at the Sino-American Strategic Economic Dialogue meeting in May. His predecessor, Hank Paulson, who has strong business connections in China, was also visiting. With seemingly exquisite timing China announced its first monthly trade deficit in six years: imports were up 66% year on year whereas exports were a mere 24% higher. The net position with the US was, however, a less than helpful surplus of $9.9bn.

The Chinese continue to be worried about inflation and PBoC Governor Zhou publicly stated last week that his main job was to combat high inflation. Judging by all the various comments that the Chinese so deliberately circulate, a currency revaluation could be the preferred measure as it would help to counter imported inflation. The bank regulators have instructed all the banks to come up with risk assessments of their loan portfolios, especially on property, and inspectors will go out in Q3 with powers to write down asset values.

In 1997 the renminbi was pegged to the the US dollar at a fixed rate of 8.27 and this remained until 2005 when it was re-valued by 2.1% to 8.11. The peg was replaced by a 'managed float' whereby the authorities set a daily rate against a basket of currencies and allowed daily movements within bands of 0.3%. In 2007 the bands were widened to 0.5%. By 2008 the renminbi had appreciated by 19% against the dollar and the managed float was replaced with a new peg at 6.83.The latest survey from Bloomberg suggests that the 3% uplift currently implicit in Non Deliverable Forward Rates will not be taken in one step but allowed to happen gradually by the end of 2010 through the re-introduction of a managed float within daily bands wider than 0.5%. Chinese officials have recently been postulating the greater use of the renminbi in international trade. In Washington this week President Hu again stressed that China had its own ways of reaching decisions but, significantly, he did not rule out a revaluation.

So when will the Chinese make a move? They will want to get the most political capital out of it whilst not appearing to bend to US demands. This might mean at the end of April, after Mr Hu’s visit this week and the G20 meeting next week and before the Strategic Economic Dialogue meeting in May. Some China 'watchers' , however, think it will be later in the year.