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As China's current account shrinks and is likely to go negative, inflationary pressure rises.
China's current exchange rate mechanism, using a band width, is too rigid for the dynamics of today's world.
Let us take a step back and understand how China "manipulates" the RMB:USD exchange rate. China buys USD denominated bonds and T-Notes from US Treasury with RMB, in other words, China floods the currency market with RMB for USD. The fundamental of supply and demand kicks in: more RMB therefore a lower price, less USD therefore a higher price. In this sense, China is not manipulating anything, China is merely buying and selling where it thinks it sees a benefit.
There are two immediate effects from this course of action.
First, China is funding USofA's budget deficit, if and when China starts winding down its purchase program, US Treasury will need to raise the coupon rates, higher interest rate will help USofA choke off inflationary pressure in the pipeline. But higher interest rate will also dampen consumer sentiment further, something USofA should not want to see happen.
Second, China holds a lot of zero or near-zero coupon rate bonds and t-notes from USofA, if new badges of bonds come onto the market with higher coupon rates, the bond yield will drop precipitously. But as long as China does not sell those bonds and t-notes, it is an unrealized book loss. That can be handled internally.
Export from China is picking up, concurrently China is stock-piling strategic resources against a global price hike. This leads to the current scenario where China is spending more than it is earning. Resources such as crude oil or iron ore are priced in USD or a basket of currencies. A weak RMB means paying more for the resource, conversely a stronger RMB means paying less for the resource. Therefore a higher RMB:USD exchange rate will directly benefit China's current account.
The argument that a stronger RMB will make China's exports uncompetitive is misleading because China has momentum and China has economy of scale, more so if the manufacturers tap the internal markets. Chinese workers are getting higher wages and salaries, sometimes upward of 20% for factory workers, this will translate to increased buying power and thus an expanding internal market for the Chinese manufacturers.
I believe the People's Bank of China is on the right path.
In summary I argue that a well thought out strategy to relax the exchange rate band is in China's interest and the sooner the better.