China Signals Forex Policy Change; Weaker Renminbi Likely—Roubini

Posted by on Jun 21, 2010 | No comment

Washington’s wish for a revalued renminbi (RMB) may finally be granted, but not in the direction of strength as Washington wants, Nouriel Roubini, Wall Street’s latest top economist, said to Reuters on Saturday.

After pegging the RMB against the dollar for almost two years, China said on Saturday that it will allow the Chinese currency to gradually revalue, a policy change the U.S. government has pressured Beijing to make for quite some time.

“This is the first significant signal in years of a change in Chinese currency policy,” Roubini, the economist monikered “Dr. Doom” for his accurate prediction of the U.S. housing collapse, told Reuters.

But details of how Beijing will implement the revaluation of the RMB is unknown, including which currencies will be referenced and which base date will be used of the new basket of currencies, Roubini told Reuters in an email.

“Since they have not changed the previous range for the band — plus or minus 0.5 percent — most likely on Monday China will allow the RMB vs U.S. dollar to move,” said Roubini.

Concerns of a sharply lower euro against the dollar-pegged RMB may have spooked China to reassess its peg. While China struggles to maintain its export advantage to the 16-nation European Union, Beijing appears to be leaning toward a weaker RMB, not a strong one that Washington has long called for.

With the danger of the euro’s continued decline, “the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome,” Roubini said.

An advisor to China’s central bank agrees.

Li Daokui, an academic adviser to Chinese central bankers, told Reuters that continued weakness in the euro against the dollar could put downward pressure on the RMB.

With the euro weakening substantially against the dollar, Roubini and others do not expect a strong RMB anytime soon.

“Even if the Chinese were to allow a gradual renminbi appreciation relative to the U.S. dollar, the size of such appreciation would be modest over the next year, not more than 3% or 4% as the trade surplus has shrunk, growth is likely to slow down on China and labor/employment unrest remains of concern to the Chinese.”

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