Just as the chances have risen in the US for the passage of a bill that would penalise China for currency intervention, Beijing has put the brakes on renminbi appreciation, raising the spectre of a bitter dispute between the world’s two biggest economies. But some analysts in China are putting a more positive gloss on the halt in appreciation. Recent history suggests that it could mean Beijing is turning a corner towards an easier monetary policy that would support Chinese growth and the global economy, they say.
The last time Beijing locked the renminbi in place against the dollar was August 2008, about three months before it launched a Rmb4,000bn stimulus programme that proved crucial to the Chinese economic recovery and the world. Some analysts believe that a repegging of the renminbi to the dollar now suggests another important shift, towards a relaxation of tight policy, might be in the offing.
“There has not yet been a change in policy but it has very clearly entered a wait-and-see period,” according to CEBM, an economics research company in Shanghai. “The renminbi gave quite a clear signal in 2008.”
The Chinese economy has held up well so far in the face of the global woes, but exporters are beginning to struggle and policies to curb inflation have also made financing more difficult for companies from small manufacturers to big property developers. With price pressures finally slackening, markets are waiting for Beijing to shift gears from fighting inflation to propping up growth.
Beijing let the renminbi rise nearly 7 per cent against the dollar from June last year until the end of August this year, an important component of its campaign to rein in inflation. But the currency’s upward march ground to a halt in September, when it dipped 0.1 per cent. The renminbi’s steady rise followed by a plateau looks similar to the pattern in 2008 a few months before the stimulus was announced.
Beyond the currency’s stall, there are other signs of a softening policy stance in Beijing.
The central bank last raised interest rates in early July and last told banks to set aside more deposits as required reserves in June. Although it has not changed its official description of monetary policy – it is still “prudent” – actions speak louder than words and the pause appears to be significant. From October until July, the central bank had increased interest rates roughly every two months and required reserves every month.
The pause since July has allowed money market rates to stabilise. At the margins, there have also been examples of some mild easing. In recent days, state-run newspapers have been full of alarming stories about the troubles of smaller enterprises in coastal China, reporting that some bosses had closed their doors and run away to avoid repaying loans. Responding to these concerns, Wen Jiabao, China’s premier, this week ordered banks to lend more to smaller business and to charge them lower interest rates.
A broader easing of policy could come before the end of this year. Stephen Green, an economist with Standard Chartered in Shanghai, said the middle of October could provide an early indication of change when the government releases third-quarter growth data and the State Council, or cabinet, publishes its assessment of the balance of risks.
More decisive moves are probably still further down the road. Shen Jianguang, an economist with Mizuho Securities, predicts that loosening, such as cutting banks’ required reserves, would come in December at the earliest. The parallels with 2008 are certainly not perfect, and few analysts forecast a rerun of the large-scale stimulus. Inflation was slowing more sharply three years ago than it has been doing in recent months and government debts were also much lower, giving Beijing a freer hand to uncork its ambitious spending programme.
“Last time, within 12 months of the stimulus, there was already criticism about the risks of inflation and debt. The government doesn’t want a repeat of that,” said Dong Xian’an, an economist with Peking First Advisory, an economic research firm in Beijing. China’s economy was also more reliant on exports before the first round of the global financial crisis. A transition over the past three years to more domestic-led growth has imbued policymakers with confidence that China can weather a slowdown in the US and Europe.
The focus in Beijing should be on reforms that foster even more of a decoupling from developed markets, said Shen Minggao, Citigroup’s head of China research. “Structurally, they can open up the services sector to provide more investment opportunities. That can also stimulate consumption. They should be doing that regardless of the situation in Europe and the US, and the earlier the better,” he said.
As for the renminbi, there is also one striking difference with the recent past. From August 2008 to June 2010, when the renminbi was in effect pegged to the dollar, criticism of China’s currency intervention was muted by the realisation that the rest of the world was benefiting from Beijing’s lavish stimulus spending.
If China’s policy shift in the coming months consists only of a moderate easing and no full-on stimulus, it will have a harder time keeping currency critics at bay.