The RMB’s advance is moderating but its march toward internationalization hasn’t.
As China enters a year of political power shift in 2012 and as Beijing sits decidedly at a crossroads on many policy fronts, the outlook for its currency, the RMB, is as unpredictable as ever. Despite of all the uncertainty, however, for many observers the fundamental themes of the RMB’s moderating appreciation and continuing internationalization effort by policy makers should remain little affected.
One recent milestone in the RMB’s ascendency was in June 2010, when China’s central bank officially announced it would further reforms of the yuan exchange-rate mechanism to improve its flexibility. Since then, the currency has appreciated nearly 12 percent on an inflation-adjusted basis and 40 percent since 2005. It also broke the 6.3 mark against USD in Feb 2012.
Now after two years’ of continuous currency appreciation and strong export-fueled growth in China – and with assurances from Chinese leaders that the country is adjusting its industrial and economic structure – the RMB has reached a level of equilibrium. So now instead of orders from Beijing, Chinese officials are hoping
to see supply and demand forces taking an increased role in deciding the exchange rate of the Chinese currency.
A shifting policy focus from inflation to growth also means a slowdown in RMB appreciation, which was frequently used as a tool by central government to cool inflation. Moreover, as noted by HSBC, as the currency enters a new phase where the market is considering a future RMB that is no longer structurally undervalued, the market will see a noticeable impact on near-term RMB flows, causing short-term currency outflows and rising volatility.
At the same time, with weaker structural and cyclical forces for strong RMB appreciation, more developments will focus on RMB internationalization, which has gained a lot of support across different government agents, and is expected to remain the key focus of RMB policy — both in terms of organic market growth offshore and widening cross-border channels.
For economist and politicians outside China, however, many still see that the RMB remains undervalued relative to all other currencies, by 5 to 20 percent, according to various estimates. But many business executives and economists say that other issues, like intellectual-property theft and barriers to entering Chinese markets, are now a bigger drag for other countries that are looking to boost their own GDP.