Could the Renminbi Depreciate?
The short answer is yes, but probably not until the Chinese currency becomes fully convertible in a few years. While China is relatively open to imports of goods and services (discussed last month), it places strict capital controls on the Chinese currency from being freely convertible into foreign currencies. Exceptions are for trade and direct investments (e.g., foreign banks recent investments in Chinese banks). The Chinese government has stated that its long-term goal is to float its currency. However, the plan is years away from being implemented. The reason is that the Chinese banking system is underdeveloped. After controls are removed and Chinese capital can move freely out of the country, we believe the currency could temporarily depreciate. Our estimate for full capital mobility into and out of China is years away. We think a fully convertible and freely floating renminbi will only occur after the next Chinese Presidential election (scheduled for mid-March 2008) and the 2008
