As China's foreign exchange reserves reach US$711 billion, the Financial Times reports that the US expects Chinese currency revaluation next month:
The Bush administration has told key senators that it expects China to revalue its currency in August ahead of a planned visit to Washington by President Hu Jintao in September, according to people familiar with the matter.
Senators Charles Schumer and Lindsey Graham, co-sponsors of a bill that would impose a 27.5 per cent tariff on Chinese imports, agreed to delay a vote on their bill after receiving what they regarded as an assurance that China will move on its currency next month.
...“Senator Graham and I believe that the administration is convinced that China will begin a revaluation process this summer, forced by our bill's success in the Senate,” Mr Schumer told the FT. Asked how Congress would respond if China did not move over the summer, Mr Schumer replied: “Every day support grows [for our bill]”.
The US Treasury has told Beijing it needs to revalue the renminbi by at least 10 per cent against the dollar. Mr Snow reiterated on Thursday that the US wanted China to move “as soon as possible.”
As I suggested back in February, China is considering fixing the renminbi against a basket of currencies, rather than a straight revaluation against the greenback. The FT notes:
China is considering introducing a currency regime similar to the managed float operated by Singapore. Under this system the renminbi would be pegged to a basket of currencies reflecting the country's trade, but the details of the weights of the basket would not be made public, a person familiar with the Chinese administration's thinking said.
A revaluation will help stave off growing US protectionism, at least for now. But don't expect it to solve the massive US-China trade deficit. It won't.
UPDATE: Both Dave Altig at Macroblog and Kash at Angry Bear have now picked up the story as well. Kash comments:
The big unanswered questions are:
* How large will the revaluation be?
* By how much will China be able to ease off on its purchases of US securities?
* What will happen to US interest rates as a result?
* What will the effect be on US imports from China?
For what it's worth, here are my guesses: 10%, not much, a very slight rise, and almost none.
And here are my answers:
* An initial revaluation of 5-10% - but moving to a currency basket will see this vary over time.
* Very little. If anything, the acceleration in China's forex reserves may see the Bank of China buying more foreign bonds - though it would be prudent for them to diversify into gilts and bunds.
* No direct effect likely on the FOMC.
* Expect some modest diversion to other Asian exporters, but a strengthening in other Asian currencies post-renminbi revaluation will partly erode any competive gains.
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