Monday, March 8, 2010

Greater China Currencies - BIS Indexes

With all the talk in the media it's worth a brief look at some data on the currency of China, the CNY. Many commentators have been suggesting a small move sometime this year and last year various leaders around the globe implored the Chinese authorities to alter their exchange rate policy.

For example top officials from the ECB visited China, but to no avail. The exchange rate policy has been implemented as a crisis measure, according to the Chinese authorities, and will only be altered gradually and carefully if at all. An economist, Roubini, suggested that China will opt for a small, careful change of about 4%.

So where has the Chinese Yuan, or Renminbi, been tracking? Following are a couple of charts using data from the Bank for International Settlements.

The above is the nominal currency indexes for the USD, CNY, TWD, and HKD. It is interesting to note the relative paths of the yuan compared to the USD. The HKD is more or less fixed to the USD. Thus you can see that initially when the CNY and HKD were fixed to the USD they traveled along the same path, while the TWD moved more independently. However in nominal terms when the CNY began to float it branched off a bit.

In real terms the CNY also has branched off quite a bit also, but still follows a similar pathway. It is arguable that there is potentially room for the CNY to move if the currency were made more flexible. It is also possible that a move in the CNY will impact on global current account imbalances, and possibly promote internal demand in the Chinese economy - as well as countering some aspects of inflation.

However the decision to alter CNY policy at this stage is entirely in the hands of the Chinese authorities, and in the long term it's likely that we'll see a more flexible and open CNY as China's ambitions to grow Shanghai as a financial center require bringing various regulations and practices to benchmark. In the short term though it is probably preferable for smaller movements to prevent disruptive after effects.

But we shall see; watching this one closely...


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