The renminbi keeps rising

yuan.bmp
I noted last month that China seemed to have changed policy with regard to the renminbi. Since then, its rise versus the US$ has accelerated, as shown in the above chart from Merrill Lynch (ML). Since August, it has been rising at an annualised rate of 13%.

ML’s explanation is that the government is having to relax credit controls as the economy slows. The recent snowstorms have further loosened policy. Yet with wage inflation now at 18%, something needs to tighten and so the exchange rate is being allowed to rise. ML say ‘it is possibly the fastest sustained appreciation’ since the PRC was founded in 1949.

ML suggest that the increase will continue, and that it will cause Asian interest rates to rise in sympathy, as well as Asian exchange rates. Outside Asia, the impact will be to export inflation to N America and Europe, as China’s export prices rise in $, € and £ terms.

This is good news for chemical exporters to China. But at a macro level, it means that the ‘virtuous circle’ of the past decade, under which China exported deflation, is well on the way to reversing itself. In turn, this will eventually limit the ability of Western central banks to cut their interest rates to try and stave off recession.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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