The Chinese Currency Hits New High Ahead of Meeting

HONG KONG
With global leaders assembling for a summit meeting in Canada over the weekend, China allowed the renminbi to close Friday at the strongest level against the dollar since currency policies were overhauled in 2005.

The Chinese central bank set its key daily reference rate for the renminbi at 6.7896 per dollar on the fifth trading day since Beijing pledged greater currency flexibility last weekend. The renminbi ended the day at almost exactly that level, having made a total gain against the dollar of 0.5 percent in the past week.

Small as that may seem, the rate changes have been highly significant. Beijing has faced mounting pressure from abroad to let the renminbi strengthen against the dollar, and its decision to begin at least a small rise could take some of the sting out of the sensitive currency issue as leaders of the Group of 20 leading economies meet in Toronto.

Before China pledged to promote currency flexibility, the issue was expected to dominate the Group of 20 talks. Now, the leaders are expected to focus on the debt crisis in Europe and financial regulation.

So far, the Chinese policy shift has earned guarded praise. President Barack Obama said Thursday that the shift represented progress but that it was too early to tell whether the eventual rise in the renminbi would be enough to help rebalance the global economy.

Many economists and U.S. politicians have argued that the renminbi’s value — which was held steady by the Chinese authorities over the past two years to bolster the Chinese economy during the global downturn — is artificially low, and that this gives Chinese exporters an unfair advantage over manufacturers in the United States.

Beijing has long signaled that any appreciation will be gradual and will come on its own terms, rather than in response to international pressure.

Its careful messages in the past week — conveyed in part through the levels of the daily reference rate — appeared to underline this point.

“The emphasis is on stability,” said Glenn Maguire, Asia economist at Société Générale, at a media briefing in Hong Kong on Friday. “They are having to stage a very fine balancing act: On the one hand, they want to be seen to be doing something. On the other, they want to prevent any speculative inflows of capital that would come with any sharper appreciation.”

Like most analysts, the Société Générale team expects the renminbi to end 2010 between 3 percent and 5 percent stronger against the dollar.

By July 2011, Société Générale expects the renminbi to have risen nearly 10 percent.

Bill Belchere, global economist at Mirae Asset in Hong Kong, commented in a note Friday that frictions over the currency issue were unlikely to dissipate.

“Unless China allows the renminbi to move much more aggressively than we anticipate, global trade imbalances, which are already re-emerging, will continue to worsen,” Mr. Belchere wrote. “This will heighten trade tensions and intensify volatility in global debt and foreign exchange markets.”