China's Currency

Every five years, the National Bureau of Statistics conducts a major revision of the way it measures inflation. It did so with the release of January’s CPI on Tuesday. There was a 4.2 percentage point increase in the share of housing costs in the basket of consumer goods used to measure inflation. The weightings of a series of other items were lowered, notably food, which it cut by 2.2 percentage points. In December, China’s CPI rose 4.6% y/y, compared with November’s 5.1%, which was the fastest in more than two years. According to the official data, annual consumer prices rose 4.9% in January. Economists polled by Reuters had expected 5.3%. Food prices rose 10.3%. Excluding food, the CPI rose 2.6%, the highest in the history of the series going back to 2002, and led by a 6.8% increase in housing costs. Rents are rising rapidly in China, along with wages.

So why don’t the Chinese let their currency appreciate already? That way, they won’t be flooding their banking system with reserves, so higher reserve requirements will actually tighten the availability of credit. Imports will be cheaper priced in local currency terms, which would also relieve some inflationary pressures. Exports might be depressed, but that might encourage manufacturers to produce more products for domestic rather than foreign consumption. So why don’t the Chinese stop pegging the yuan? Well, apparently they may have stopped doing just that without telling anyone. The yuan was pegged around 6.82 yuan/dollar from July 18, 2008 through June 18, 2010. Since then, it has been moving higher, and is now around 6.59 yuan/dollar. The last time that the Chinese allowed their currency to appreciate was from July 22, 2005 to July 11, 2008, when it rose 19.8%. I think they’ve started to do it again.