International | Jun 17 2008
By Chris Shaw
In the first quarter of 2008 the Chinese currency appreciated at an annual rate of around 17% against the US dollar but as SVB Financial Services FX manager Fernand Kong notes, this has since slowed to a rate of something closer to 7% in annual terms as doubts have begun to emerge in the global market over whether the currency appreciation policy in place will be maintained.
Speculation has been based on views the policy has not been successful in addressing the increase in inflation in China, nor is it helping exporters or discouraging huge speculative inflows of capital, the latter evidenced by the country’s forex reserves of more than US$1.7 trillion.
As Kong notes the Chinese authorities surprised the market last week by lifting interest rates aggressively, which suggests the assumption exchange rate appreciation would be the only measure used to fight inflation is wide of the mark and monetary policy will also be used.
Kong also sees it as a sign the Chinese central bank may be willing to play its role in the expected global hike of interest rates in the second half of this year as central banks around the world move to deal with the growing inflation threat.
The size of the increase, where reserve ratios were lifted by a full percentage point against market expectations of a move of half the size, also suggests the Chinese themselves are increasingly concerned about inflation in their economy and are more willing to be aggressive in addressing the issue.
Assuming China joins the fight against inflation Kong expects to see authorities remain committed to a stronger currency, though the focus of any increases are expected to be on a basket of currencies rather than just against the US dollar.
This adds to uncertainty as to the potential for further sustained increases against the greenback, the most likely outcome in his view being further appreciation but at the slower rate experienced over the past three months or so.