While many Asian governments say they want to use higher exchange rates to limit inflation, some economists think China may have cooled on the idea.
In November, when inflation in China was accelerating, the authorities began to increase the pace at which the renminbi was appreciating against the US dollar, so that the currency was strengthening at an annualised rate of nearly 20 per cent in the first quarter.
Since mid-April, however, the pattern has changed, with a period when there was virtually no change in the exchange rate followed by renewed but slower appreciation. At last week's China-US summit in Annapolis, Chinese officials complained about the sharp decline in the value of the US dollar, prompting further talk of a change in strategy in Beijing.
Many observers have pointed out that the slowdown in renminbi appreciation coincided with sharp criticism within China about the difficulties faced by some exporters because of the stronger currency, a new labour law and tougher environmental regulations.
“There have been increasing voices raised throughout the government warning against rapid appreciation and sometimes even urging depreciation,” says Barry Naughton, professor of Chinese economics at the University of California in San Diego, although he notes that these higher costs have not prevented exports from growing strongly.
Management of the exchange rate has also been complicated by a huge surge in capital inflows this year, some of it “hot money” betting on a stronger renminbi.
The slower appreciation against the dollar could be a signal to discourage speculators.
Yet a handful of economists believe that the best way to limit speculation would be a one-off jump in the currency or a much more rapid appreciation.
According to Lawrence Goodman at Bank of America, China's current methods for absorbing capital inflows – sterilisation through bond issues and higher reserve requirements – might be reaching their limit. “There is some possibility that the central bank will enter a new phase characterised by a more swift appreciation in the currency,” he says.
