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Now that
Singapore has done it, the big question for the global
investment community is whether China will follow suit.
Responding to rising commodities prices—especially the
intolerable surge in the cost of imported food—the
Monetary Authority of Singapore last week signaled its
preference for a stronger home currency.
What the
monetary authority said it would do is to reset the
middle point of the (undisclosed) band in which the
Singapore dollar is allowed to fluctuate against a
basket of (unnamed) trading partners’ currencies.
The new
center, which market participants can and do fairly
accurately guess, would be the current level of
Singapore’s nominal effective exchange rate.
“It
amounts to a de facto revaluation,” V.
Anantha-Nageswaran, head of research for Asia and the
Middle East at Julius Baer Holding AG, wrote in a note
to clients.
Singapore’s
anti-inflation stance is for the good of its 4.6 million
residents and its status as a financial center; were
China to do something similar, it would be for its own
benefit, as well as in the interest of the world
community.
Can
China use a stronger currency to tame the intolerable
23-percent pace at which its food prices rose in
February from a year earlier? It can, but only if the
appreciation in the yuan takes the form of a large,
one-off revaluation.
Speculative flows
The
current regime of fairly rapid appreciation is
counterproductive because it “will only encourage hot
money flows,” Michael Pettis, a Peking University
professor of finance, says on his Web log.
A
revaluation in the Chinese currency could—apart from
helping China to rein in prices—also provide an
opportunity for other countries in the region to tame
inflation.
With
export competitiveness as less of a constraint, Asian
nations would rather let their currencies appreciate
than raise interest rates in an environment of slowing
global growth.
Of
course, anything like, say, a 20-percent revaluation in
the yuan could badly spook already jittery financial
markets.
So
perhaps the best time to announce it would be just after
the Olympics—as a kind of return gift to the
participating nations. By then, of course, there’s a
chance that it may not even be needed.
Slowdown
predicted
According to several analysts, there’s already enough
slowdown in the world to deflate the commodities bubble.
“Commodity prices are going the wrong way,” says Simon
Johnson, the chief economist at the International
Monetary Fund, which recently estimated the likelihood
of a global recession—led by a slowdown in the US
economy—at 1-in-4.
“A
slowdown in OECD energy demand—60 percent of the
total—is clearly already under way and likely has
further to go in 2008,” says Fitch Ratings.
“A
weakening
US economy, coupled with the forecast slowdown in Chinese GDP
[gross domestic product] growth to 9.7 percent from 11.4
percent in 2007, the slowest in six years, is likely to
take a further toll on metals demand.”
Fitch
wrote that report before China last week raised its
estimate for last year’s growth to 11.9 percent. That
prompted Goldman Sachs Group Inc. to say the Chinese
economy will grow faster than 10 percent in 2008.
That may
be too high to cause an appreciable slump in China’s
hunger for commodities.
Carry
trade
A halt
to the rapid buildup of fixed-asset investments in
China, which accounted for 90 percent of the increase in
the consumption of four key base metals from 2005 to
2007, is an imperative.
It isn’t
a certainty, though—the opposite might happen.
“Beijing
will respond to a slowing external economy by boosting
the domestic economy, especially fixed-asset
investment,” Citigroup Inc. commodities analysts Alan
Heap and Alex Tonks wrote in a report this month. “There
is still a lot of infrastructure to be built.”
What
about food?
Fitch
says food supplies can get scaled up more quickly in the
short run than, say, oil or metals.
“This
points to the likelihood that high food-price inflation
will prove less protracted than oil and metals
inflation,” the ratings company says.
That
forecast may well come true.
For the
moment, though, it looks like agricultural commodity
prices will remain uncomfortably elevated unless there’s
a large deceleration in biofuel demand or an end to the
growing hunger for protein in China and India.
No
return gift?
What if
the global recession fails to materialize, or is too
shallow to produce a large disinflationary shock?
In that
case, will
China
revalue the yuan to cool its economy and curb inflation?
If China
fails to “import” a soft landing through a “US-led
global downturn,” it may seek to induce one through a
“large revaluation of the exchange rate,” says Morgan
Stanley economist Qing Wang in Hong Kong.
“This is
the most likely alternative scenario,” Wang wrote in a
March 27 note to clients.
Ultimately, China won’t do anything drastic, unless its
domestic inflation, already at an 11-year high of 8.7
percent in February, continues to worsen.
As for
the Olympic spirit of universal brotherhood, China can
always point to the bad behavior of its guests—who are
suddenly getting all worked up over Tibet—to deny them a
return gift. |
