ÔÉėSwiss National Bank to continue intervening to
prevent appreciation of Swiss franc
ÔÉėChina regards exchange rate
peg as temporary measure
no hurry to adjust exchange rates
Although there is still strong domestic resistance to the
austerity measures in Greece, financial markets are starting to view the situation in a more
relaxed light. This is probably partly thanks to prime minister George
Papandreou‚Äôs goodwill tour to the US, and partly as a result of the proposal to set up a
European Monetary Fund (even though the ECB seems to be showing little
enthusiasm for the idea). During the course of the week, EUR-USD firmed
somewhat to almost 1.38.
On Thursday, the Swiss central bank published its quarterly
monetary policy assessment. According to the SNB, the signs of an economic recovery
are becoming increasingly evident, albeit in an uncertain environment. The bank
confirmed its current expansionary monetary policy but, as in the previous
quarter, indicated that over the entire forecast horizon (which also includes 2012)
interest rates were set to rise. The SNB again confirmed its willingness to
intervene by reiterating the standard phrase that it will act decisively to
prevent an excessive appreciation of the franc. In the last few weeks, the SNB
had intervened repeatedly when the franc had risen to about 1.46 against the
Peking‚Äôs exchange rate
Last week, PBoC governor Zhou Xiaochuan caused a stir by stating
that the yuan‚Äôs peg to the dollar (since summer 2008) had been introduced as a
special measure to combat the financial crisis. Some market participants
interpreted this comment as a signal that there could soon be some movement in
the USD-CNY exchange rate.
The PBoC oracle does not, however, give any indication of
when that temporary exchange rate peg will be abolished. Minister of commerce, Chen
Deming, for instance, said that it would take Chinese exports two to three
years to get back to pre-crisis levels. The head of SAFE (China‚Äôs State
Administration of Foreign Exchange) stated that China wanted to keep the exchange
rate ‚Äúbasically stable‚ÄĚ, a phrase also used by China‚Äôs premier Wen Jiabao in
his speech before the National People‚Äôs Congress.
This week saw the release of numerous Chinese economic data.
The fact that in February inflation had accelerated to 2.7% from 1.5% the
previous year caused a lot of concern. Inflation could well rise to over 3% in
the next few months, but this should not be overdramatised, in our opinion. Food
prices are the main driver of inflation; they have risen by over 6%. It should
be borne in mind, however, that the exceptionally bad weather of the past few
months and particularly strong demand in the run-up to Chinese New Year will
have played a significant role.
The foreign trade figures indicate that export growth
momentum is moderating. At $22bn, the trade balance surplus in the first two
months of this year has dropped by almost half compared to the previous year.
Exports in January and February combined have returned to the level of the beginning
of 2008, imports, however, have risen
Credit growth in China is still very robust, however. Admittedly the volume of new
bank loans dropped from 1390 to 700bn yuan in February, but that is still a
very large amount, particularly for a month influenced by New Year
celebrations. Despite the sharp increase in 2009, bank loans grew by almost 30%
year-on-year. At 23%, money supply growth (M2) was extremely high, even by
Chinese standards. The benchmark for money supply growth is around 17%.
In our view, however, there is at present little danger of
the Chinese economy overheating. The export sector is recovering but exports
are not generating the momentum. Investment activity is particularly buoyant,
especially as loans are easy to come by and households and companies have large
amounts of liquidity at their disposal. In our view, this constellation
suggests further monetary policy tightening by raising interest rates and deposit
reserve ratios. From China‚Äôs point of view, an appreciation of the yuan, which would dampen
exports, is not urgent. Furthermore, it is uncertain whether an appreciation of
the yuan would slow down capital inflows from abroad or boost them.
We expect the Chinese economy to at best allow very cautious
exchange rate changes. But the yuan is likely to remain in the spotlight in the
next few weeks. This week US president Barack Obama joined the debate by pressing China to move to a ‚Äúmore market-oriented‚ÄĚ exchange rate. US
policymakers will have a further opportunity to criticise China and make trade policy threats in mid-April in the
semiannual report on ‚ÄúInternational Economic and Exchange Rate Policies‚ÄĚ, in which
the US Treasury Department decides whether a currency is being unfairly
manipulated. But the US government will presumably wish to avoid an escalation of
Stephan Rieke +49 69 718-4114
Grabbe / Klaus N√§fken
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