Chinese Renminbi: Reforms in Focus


Following some volatility in late June and mid-July, the renminbi has consolidated around 6.12/US$. Some observers have suggested that the trading band of the currency, currently set at +/-1% against the US$ on a daily basis, may be widened in the not too distant future. However, while greater FX flexibility could allow for more effective monetary policy and inflation management, the timing of any adjustment is speculative and may hinge on the ability of the economy to emerge from its present soft patch. Certainly, fear of disruptions to the banking sector following a liquidity crunch in June is a part of the reason why government has been cautious about lifting the cap on deposit rates. Such a move, though, seems critical in efforts to prevent capital outflows, limit dependence on investment and exports and increase consumption as a share of GDP. In terms of policy, Beijing was forced to introduce a mini stimulus package in late July to regain the growth momentum, which disappointed in Q1, and may unveil tougher and more intensive reforms at the Communist Party plenum in November. Q2 saw the economy stabilise and early indicators for Q3 suggest that the recovery is taking shape, which could provide the basis for bolder policy action. Most panellists, though, expect only a modest upturn in the second half of 2013, rather than a significant resurgence, not least because of the investment headwinds caused by uncertainty about the US fiscal deadlock (page 3). In all, the consensus is predicting that the renminbi will appreciate slightly over the next twelve months.

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