From China – RMB

Beijing vowed that it will retaliate if the United States declares China a currency manipulator and imposes trade sanctions, firing the latest salvo in a spat over the RMB. This seems to be the consensus view from people in China itself – a sentiment that I gathered during my recent trip to southern China recently. The Commerce Minister Chen Deming accused Washington of politicizing the RMB issue ahead of an April 15 deadline for the US Treasury to rule whether China is unfairly holding down its exchange rate to gain a competitive edge in global markets.

My sense is that US intensifying political pressure on China to revalue its currency will only be counter-productive. The stronger the pressure, the lower the chance China will bite the bullet. My contacts seemingly to suggest that the RMB revaluation is already on the list of agenda, but it will not be pursued aggressively as China doesn’t want to be seen to be dictated, and preferably want to make the change in its own accord. Over a decade or so, economic interests have strongly intertwined with nation pride and any submission to external pressure will be seen as a sign of weakness in current government. It might not be a sensible thing to do, but it is a big thing to be dealt with in China. Only those who had been suffering the humiliation prior to 1949 tend to have better appreciation of it.

In this trip, I realized that the top priority now for China is to cool down the asset bubble. It is of the opinion that the currency factor will only ignited more fires and to elevate long-term optimism in the investment in China’s properties and that would further complicate current situation. It is not uncommon that investors in China’s property to factor-in at least 15-20% appreciation of RMB in the next 3-5 years when they make decision to invest in property now – especially in the luxurious sector. Today, high property price is almost a nationwide phenomenon, especially after a strong dose of fiscal stimulus of RMB4 trillion and loose monetary policy (new loans made amounted to more than 30% of nominal GDP) to address the credit crisis in early 2009. Consequently, property prices in second, third and fourth tier Chinese cities have surged as well. At present, currency appreciation will not solve the problem of asset bubbles and if the government fails to rein-in inflation expectations, there is a real potential that exchange rate in real terms will even depreciate.