Geithner Says China Currency Reforms are Significant and Promising
The cumulative effect of China’s recent exchange rate reforms is very significant and very promising, said Treasury Secretary Timothy Geithner at the Brookings Institution on April 18. Geithner’s remarks followed China’s decision to widen the Renmenbi’s trading band against the dollar from 0.5% to 1%, as well as broader reforms to increase RMB convertibility.
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RMB Appreciation Reflects Shift in Growth Strategy to Domestic Demand
Geithner noted that China has allowed the RMB to appreciate by 15% against the dollar in real terms since June 2010, and said that since 2005 the real appreciation has been closer to 45%. According to Geithner, Chinese monetary authorities have also been intervening significantly less in currency markets in the past six months. China has also begun to loosen the comprehensive set of controls it has placed on the RMB and the ability of people to use and borrow in RMB.
As a result, said Geithner, China’s current account surplus has fallen dramatically, and its expected current account surplus has come down significantly as well. According to Geithner, these actions signal a continued commitment by Chinese authorities toward a growth strategy less focused on foreign demand and more focused on domestic demand.
Part of Series of Reforms Aimed at RMB Convertibility, Including New Settlement Scheme
China’s move comes amid a push to increase RMB convertibility and make the RMB more attractive as a global currency. The official news agency Xinhua reported that China has officially begun a program of reforms to increase the convertibility of the RMB to expand the use of the RMB in cross-border trade and gradually increase the channel for capital outflows.
Xinhua said that, as part of China’s convertibility scheme, China’s central bank has announced a new system to settle cross-border payments in RMB, to be established in one to two years. According to the report, the government said the new scheme will make RMB settlement safer and more efficient for cross-border traders and investors.
Additionally, according to a report in the Wall Street Journal, China lifted a 6.5 year old ban on bets on RMB appreciation against foreign currencies in the Chinese foreign exchange market. According to the WSJ, the ban had helped China fight speculation over RMB appreciation.
Mixed Reaction from Chinese Exporters; SMEs Tentative
Xinhua said the reception of China’s large export sector to the widened currency band has been mixed. According to the report, bigger companies see opportunity in the freer-floating exchange rates, but small and medium-sized businesses will face difficulties in adjusting.
Geithner’s remarks at the Brookings Institution (dated 04/18/12) available here.
Chinese government press release (dated 04/14/12) on widening the RMB trading band available here.
Xinhua report on making RMB convertible (dated 04/10/12) available here.
WSJ report on repeal of ban on net long bets on the RMB (dated 04/16/12) available here.
Xinhua report on Chinese exporters’ reaction to widening of RMB trading band (dated 04/16/12) available here.