Speculators Start Sniffing the Yuan

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Besides, we doubt that Washington will be that focused on the issue. Iraq, investigations into everything from the conduct of the war to sexual harassment on the Hill, and immigration will all be competing for attention in the Capitol over the next two years.

And if the issue does somehow make it on the agenda front and center, it will take substantive legislation for Beijing to take the threat seriously.

So what about the speculators? Well, while a few funds seem to be willing to spend a little bit of money to buy some NDFs to profit from a quicker appreciation, real money flows into China seem to have reversed. "Hot" money—funds that move across China's borders by hook and by crook—are by definition hard to track. But the situation now is that after the large capital inflows that took place from 2003 to 2005, hot money has begun to leave China.

Real Estate Party Over

Why would such money be leaving now? Certainly, expectations of yuan appreciation have not changed much. So we can discount that. Instead, it seems that the crackdown on residential real estate price growth in the first half of this year played an important role. Home price growth of 20%-plus is a big enough motive for people to import funds, with the assumption that the exchange rate can only go one way.

This does not have to be foreign money—many domestic Chinese probably thought that this was a good time to bring back money stashed overseas. As property price growth has slowed, the easy money has all been made, thus causing flows to slow and probably reverse.

So, ironically, just at the time when the NDF market is signaling that speculative activities are on the rise, pressure on the currency from such hot flows is decreasing. Of course, the absolute pressure remains high—trade surpluses of $20 billion or more each month mean that the FX reserves are still rising.

And the People's Bank still has a tough fight on its hands to keep all the liquidity from flooding into the economy and causing inflation. But with inflation stable, at least for the moment, Beijing shows little signs of changing course. The yuan has moved 3% against the dollar this year. And it will move 3%, maybe 4%, in 2007. And that is unlikely to calm the China critics in the U.S.

Green is a senior economist at Standard Chartered Bank and is based in Shanghai. He works on China's macroeconomy, and has a particular interest in monetary policy in China. He has published a number of books, including China's Stockmarket (Profile Books/The Economist, 2003) and China's Stock Market Development, 1984-2002: Market Institutions and Equity Politics (Routledge, 2004). He is the co-editor of Exit the Dragon: Privatisation and State Control in China (Blackwell, 2005). Before joining Standard Chartered, Green was head of the Asia Programme at Chatham House, The Royal Institute of International Affairs, in London, and deputy editor on The Economist's The World in... magazine. His articles have appeared in the Wall Street Journal, Financial Times, and South China Morning Post, and he regularly appears on Bloomberg, CNN, MNBC, and the BBC. Stephen has a PhD from the London School of Economics. He has been a visiting researcher at Fudan University in Shanghai and at the Shenzhen Stock Exchange. He speaks Mandarin Chinese.