In an historic move in late November, the People’s Bank of China, the country’s central bank, conducted the first ever swap of renminbi with the US dollar, a move that it intends to repeat fortnightly.
The initial swap involved 10 domestic banks buying $6 billion from the PBOC in exchange for renminbi at the prevailing spot rate, with the agreement to swap the dollars back in 12 months time at an agreed rate of Rmb7.85 to the dollar. That compared with a spot rate of 8.0805 and the non-delivered forward rate of 7.76 before the deal. The NDF rate adjusted after the deal to 7.78.
A tiny swap by normal market standards might not seem worth shouting about but in Chinas surreal financial system any semblance of normality attracts disproportionate attention. Commentators noted that the PBOCs actions were a further indication of an inch-by-inch opening of Chinas capital account.
The move also helps economists to read Chinas foreign exchange runes. Stephen Green, senior economist at Standard Chartered Bank, points to the NDF movement after the deal as evidence that the market was mispricing a large renminbi revaluation in 2006. In addition to the PBOCs recent significant tightening of monetary policy of late, Green sees the swap move as further evidence that China will not revalue the renminbi significantly in 2006, but gradually.
When PRC officials come out and tell the markets that the [renminbi] is in for the most gradual of appreciations, they actually mean it, says Green. You would not tighten monetary policy so quickly if you had a revaluation up your sleeve.