China’s currency is not really appreciating

Those aren’t my words.

They are the title of a chart -- "the CNY is not really appreciating" -- in Standard Chartered’s March 19 FX alert, an alert produced by Callum Henderson, David Mann and Stephen Green. Their point is simple: The RMB’s appreciation against the dollar, which unquestionably has picked up since November, has been offset by the dollar’s depreciation against a host of other currencies.

Between the end of 2007 and March 19 2008, the RMB was up 3.2% against the dollar. But the RMB was also down 3.2% against the euro and 9.4% against the yen. Subsequent currency moves haven’t changed the basic story all that much.

From the beginning of 2006, the RMB is up 12.2% against the dollar but down 16.0% against the euro. And Europe, not the US, is China’s largest export market -- and the main source of Chinese export growth. The US was the world’s consumer of last resort through 2005. More recently, though, it has been Europe. The Standard Chartered team writes:

"Last year we calculate, the US only bought 22% of China’s goods -- and only provided 13% of the increase in exports. Europe in contrast, bought 27% [of China’s exports] and was responsible for 31% of the growth."

The Standard Chartered team now expects the RMB to appreciate by 15% v the dollar in 2008, making up for some of its past depreciation against the euro.

They concede that there forecast is ahead of the policy consensus in China. They expect, though, that the new Chinese economic policy team will be pulled in their direction by ongoing dollar weakness, low US rates, inflationary pressure and the risk of even larger hot money flows.

I personally would be surprised by a 15% move. Not because such a move doesn’t make economic sense. But rather because, as the Standard Chartered team notes, "the default mode in Beijing has been caution." Right now though a faster than expected pace of RMB appreciation against the dollar cannot be entirely ruled out. China presumably doesn’t want all of the necessary real appreciation of the RMB to come from higher inflation. $50b or so in monthly reserve growth likely has caught the authorities attention. As has the possibility that the US may not be through cutting rates.

Plus, Mr. Green has a record of getting some bold calls right. He was, I think, the first to suggest that China’s 2007 reserve growth might really approach $500b -- and among the first to suggest that China’s 2007 current account surplus would be really big.