A week after Premier Wen Jiabao opened the National People’s Congress by lowering China’s 2012 GDP growth target, and only a couple days after China announced its largest trade deficit in more than a decade, People’s Bank of China (PBOC) Governor Zhou Xiaochuan claimed that China has enough slack to further ease its monetary policy. From Reuters:
“There is a pretty big room for RRR cuts,” Zhou said at an annual press conference, referring to bank’s reserve requirement ratio.
“The RRR is just over 20 percent now. We had a low RRR of 6 percent in the late 1990s, even lower than that in some countries.”
But Zhou said future RRR moves will depend on the overall liquidity in financial markets, as determined by China’s balance of payments and total foreign currency purchases by the central bank and Chinese commercial banks.
“The biggest uncertainty in the international economy is, as we all know, the recovery, and especially with regards to Europe’s economy and the euro sovereign debt crisis,” Zhou said.
The trade figures and currency valuation are linked economically and politically. Economists often judge whether a currency is undervalued by gauging the size of the trade surplus, and how much a currency would have to gain in value to eliminate or sharply scale back that surplus. Politically, exporters and their allies fight harder against appreciation, which makes exports more expensive as the trade surplus narrows.
The yuan has depreciated roughly 0.5% against the dollar since the beginning of 2012, after gaining 4.7% last year.
While bank analysts have argued that China’s currency was likely to increase in value this year, though at a slower pace than in 2011, Monday’s news conference was the first time China’s central bankers have weighed in on the subject publicly. The briefing was well attended, with Chinese reporters jostling each other and grabbing the microphone to try to get their questions answered.
The PBOC probably isn’t the last word on the subject. Significant economic policies are decided by at the State Council, the government’s highest administrative body, with considerable input by the standing committee of China’s Politburo, the Communist Party’s top group. It isn’t known whether either body has recently debated foreign-exchange rate policy.
The Financial Times, however, reports that the trade deficit and today’s comments by China’s top bank officials may indicate that China believes its currency is no longer significantly undervalued:
Barack Obama, the US president, has so far followed his predecessor George W. Bush in refusing to declare that China is a “currency manipulator”. But Mitt Romney, the frontrunner for the Republican presidential nomination, has said he would make that designation on his “first day in office”.
But a growing number of voices inside and outside China point to the country’s trade data and other indicators, such as cross-border capital flows and a slower build-up of the country’s foreign exchange reserves, as evidence that the renminbi is indeed nearing a level that is not seriously undervalued.
After appreciating a little more than 5 per cent against the US dollar last year, the renminbi has barely budged this year, and last week it had its weakest run against the greenback since mid-2010.
The New York Times also points out that in the midst of the press conference the PBOC lowered its daily peg for the renminbi and it fell to its lowest point vs. the U.S. dollar in seven weeks.