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July 15, 2005

China's First Currency Revaluation Coming This Summer?

The Bush Administration tells the Congress that China will revalue its currency in the next two months:

FT.com / World / US - US expects Chinese currency revaluation: By Demetri Sevastopulo and Andrew Balls in Washington, and Richard McGregor in Beijing: The Bush administration has told key senators that it expects China to revalue its currency in August ahead of a planned visit to Washington by President Hu Jintao in September, according to people familiar with the matter.

Senators Charles Schumer and Lindsey Graham, co-sponsors of a bill that would impose a 27.5 per cent tariff on Chinese imports, agreed to delay a vote on their bill after receiving what they regarded as an assurance that China will move on its currency next month.

In a June meeting attended by Alan Greenspan, Federal Reserve chairman, John Snow, Treasury secretary, told the senators that he believed China would allow the value of the renminbi to increase against the dollar in August, the people familiar with the discussion said.... The US Treasury has told Beijing it needs to revalue the renminbi by at least 10 per cent against the dollar. Mr Snow reiterated on Thursday that the US wanted China to move “as soon as possible.”

China’s foreign exchange reserves increased by just over US$100bn in the first six months of this year to US$711bn, nearly double the rate at which its store of overseas currency rose in the same period last year. China is considering introducing a currency regime similar to the managed float operated by Singapore. Under this system the renminbi would be pegged to a basket of currencies reflecting the country's trade, but the details of the weights of the basket would not be made public, a person familiar with the Chinese administration's thinking said.

Tony Fratto, Treasury spokesman, said: “Secretary Snow did not provide an assurance on a specific time-frame for when China would reform its currency regime. Targeting a specific date or time-frame is counter-productive. That said, it is clear that China is prepared to move now. It would be in the best interests of China, and the global financial system, if these reforms came sooner rather than later.”...

The debate over the renminbi will be fuelled, in China as well as in the US, by news that the country's foreign exchange reserves increased by more than $100bn in the first six months of this year to $711bn. China's foreign reserves are on track to break $1,000bn by June next year if it continues to expand at the present rate.

China is a $2 trillion economy. That rate of reserve accumulation means that 10% of China's total income is being spent buying reserve assets--the overwhelming bulk of them dollar-denominated.

That is amazing...

Posted by DeLong at July 15, 2005 12:45 PM