Renminbi future remains murky as many hope for floating currency

The sheer number of people with a strong personal stake in the future of the renminbi is staggering. Laborers in China’s coastal provinces, central bankers around the globe, consumers across the developed world and workers in America’s factories will all feel changes large and small if the Chinese currency regime changes.

Last month, the People’s Bank of China said that it would abandon its current policy, a peg which ties the value of the renminbi to the dollar.

Since then, however, actual movements in the direction of a true floating currency have been vague. The renminbi’s value floats, but only in a narrow “band” that is limited to movements within half a percentage point of the daily rate set by the central bank, limiting both the upside and the downside.

This is actually not the first time China has dropped the peg on the renminbi; it did so in 2005, and the currency jumped 2 percent and continued to rise thereafter. The peg was restored in response to the global economic slowdown in an effort to safeguard domestic manufacturers.

The renminbi is still subject to very strict currency controls. A black market exists, but it is highly illegal and has not reached the same level as, for instance, Venezuela, where a huge number of transactions take place through the parallel market.

Domestically, China is trapped between two opposing forces – the need to remain competitive with foreign manufacturers, and thus secure China’s place as the world’s low-cost factory, and the desire of Chinese citizens to get more for their pay. China’s currency makes imports very expensive, and a burgeoning middle class has grown increasingly fond of foreign luxuries it was once not able to enjoy.

Some economists have calculated that the persistent undervaluation of the renminbi is equivalent to a $1,000 subsidy to every American family, in the form of cheaper goods.

The Financial Times’ Beyond BRICs section believes that Chinese regulators are slowly but surely moving to a floating currency, trying to appease both domestic concerns, which fear becoming uncompetitive, and foreign interests, which are weary of competing with Chinese imports.

“The most common explanation for the sudden flurry of announcements is that the central bank has been battling to win domestic political support for the shift to a more flexible currency, which has been resisted in many quarters,” said the column.

The remninbi’s foreign exchange future thus remains far from clear.