The US has warned Beijing not to go back to manipulating its currency, following a sharp depreciation of the renminbi since the start of 2014.
"If the recent currency weakness signals a change in China's policy away from allowing adjustment and moving toward a market-determined exchange rate, that would raise serious concerns," said a senior Treasury official ahead of this week's IMF, World Bank and G20 meetings in Washington.
The renminbi has fallen more than 2.5 per cent against the US dollar since mid-February, a small amount for most emerging markets but a dramatic shift for the Chinese currency following years of slow and steady appreciation. It trades at Rmb 6.20 against the US dollar, roughly the same level as this time last year.
The US comments highlight concern in Washington that China will be tempted to respond to a slowing economy by holding down its currency in order to boost exports. Such moves could lead China to reduce global demand at a time when several other regions of the world, such as the eurozone, are weak. That in turn could hamper US growth.
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The fall in the renminbi has been widely seen as an engineered policy move by the country's central bank, which has the ability to move the currency through a daily fixing rate, and through direct intervention. The renminbi can now trade higher or lower from its mandated fix by 2 per cent a day following the recent widening of the official trading band.
However, most analysts believe that Beijing's decision to weaken the renminbi was not a ploy to boost competitiveness. Instead, the authorities have sought to stamp out currency speculation from companies and investors who had treated the renminbi as a one-way bet by introducing more meaningful two-way volatility. It also has the positive side-effect of increasing domestic liquidity at a time when stress within the financial system is rising.
Many currency analysts and economists maintain that the renminbi will ultimately return to a path of appreciation so long as China continues to generate significant current account surpluses, attract large net foreign direct investment inflows and further accumulate excessive reserves.
While China's slowdown and the vulnerabilities of its shadow banking system are likely to be one theme of the G20 this week, it is unlikely to come under too much pressure – Ukraine and the eurozone are both likely to be higher up the agenda.
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The Obama administration thinks that moving away from exports, via a more fairly valued currency, is in China's own interests and has generally sought to avoid pushing too hard.
"To secure its own long-term growth and contribute more to global growth, China needs to shift to a growth model that relies more on consumption and less on investment and exports," said the Treasury official.
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