Place your bets...

Steve Roach at Morgan Stanley:
Dr. Zhou Xiaochuan, Governor of the People's Bank of China and the one of the nation's leading macro thinkers, has put the Chinese currency issue to rest for the time being. “Now is not the time,” he said in an interview on the eve of the 5 February G-7 meeting in London when queried about China’s plans to adopt a more flexible foreign exchange regime. That puts an end to speculation of an imminent move and even draws into question my view that China is actively preparing to modify the decade-long peg between the renminbi and the dollar (see my 31 January dispatch, “An Unprepared World”). Governor Zhou qualified the concept of preparation for full RMB convertibility as one that “may take years to achieve.”

Roubini and Setser's new paper on Bretton Woods II and renminbi revaluation is summarized here, and an interesting dissenting view here.

Roubini and Setser have (kind of) gone out on a limb predicting things will become intolerable for the PRC government within 2 years. Others think things could continue as they are for another 5 years or more. That's the great thing about academia - (1) the amount of skin you have in the game is limited (no one will fire you for getting things wrong, and you won't have lost an investor or (shudder) your own account billions of dollars) and (2) you can waffle a bit in your predictions. This should not be taken as a criticism - predicting macro or FX movements is extremely hard, and the detailed analysis lays out all the assumptions for you to see. But, there is something very nice about being able to look at a trader's P/L (bottom line) to see if he really got it right or wrong! ;-)

An interesting factual question is raised by these analyses. To what extent are the BOJ and PBOC actually sterilizing currency flows? I suppose the BOJ can have it either way, since they are (a) facing deflation and (b) have such low domestic interest rates. The latest inflation report from China was rather benign, so if they are not sterilizing, and hence not building up unbalanced yuan obligations vs dollar assets, they should be able to continue for some time.

My previous thoughts are here, as well as elsewhere on this blog.