China is poised and ready to make a decision on its exchange rate regime, the US treasury's point man for the Asian nation told Emerging Markets yesterday. "Everything is in place for them to move forward, everything we see indicates that they are ready to go, and we welcome them to move," said Paul Speltz, economic and financial emissary to China at the US treasury.
His comments came as finance ministers from China, Japan and South Korea gathered last night for a tripartite meeting. Although ministers avoided any decision on exchange rates during that meeting, Korean finance minister and deputy prime minster Han Duck-soo said that "interest was indicated" in the issue. The ministers agreed, however, to "enhance the effectiveness of the Chaing Mai initiative."
The revaluation of the renminbi has overshadowed other issues at the annual meeting because of the opportunity presented for the three key finance ministers (Jin Renqing of China, Sadakazu Tanigaki of Japan and Han Duck-soo of South Korea) to consult not only among themselves but also with their Asean counterparts. This provides an ideal environment for decisions on key issues such as exchange rates. Long public holidays in both China and Japan should minimize any market fallout, observers said.
Speltz, who was appointed by US treasury secretary John Snow to oversee the often delicate negotiations with Chinese authorities on the renminbi exchange rate, emphasized that it was China's call as to exactly when an announcement is made. "It is their sovereign decision and they have to make that decision in their own way," he told EM. "But we hope that they will make it sooner rather than later."
One year ago China was not ready or able to make a move on the renminbi, he suggested. But there is a much higher level of preparedness now, said Speltz, who is also the US executive director at the ADB. "We are working with them very closely and we have had full engagement and ongoing, quiet meetings at every level." Ultimately, any decision on the renminbi has to be made by China's "ultimate leadership," he stressed. "Everything is [decided] at State Council level."
China is not expected to make a dramatic change in its exchange rate system and is likely to opt to widen the trading range of the renminbi as a preliminary step to moving towards an exchange rate based on a basket of currencies, said Standard & Poor's sovereign and international public finance ratings director Ping Chew in Istanbul yesterday. "We are not expecting too drastic a change in the Chinese exchange rate system," he said.
The impact on neighbouring economies of a Chinese move on exchange rates is likely to be minimal in terms of economic growth and trade flows if China is allowed freedom to move in its own time, Chew suggested. An upward revaluation of the renminbi would be less damaging in this respect than devaluation. Central banks reserves in the region are also strong enough to cushion any balance of payments impact.
But China is under "tremendous pressure to move, both internally and externally" and any sudden or substantial revaluation of the renminbi could have a disruptive effect, he warned. There could be substantial outflows of capital from China and also from Hong Kong, in that event, he suggested. On the other hand, countries such as Taiwan or Malaysia could experience sudden and "speculative" capital inflows, placing upward pressure on their exchange rates. Chew added that China's economic and financial structure is not yet strong enough to withstand a total removal of capital flows.