>China: inflation, economic growth and exchange policy (NATIXIS)

Following successive statements by China’s authorities (the USD/RMB peg is a “non-conventional” measure linked to the global economic crisis, RMB exchange policy must depend solely on the country’s economic situation...), we know that sooner or later the PBoC will replace the current peg with another exchange rate regime and that stable economic recovery would be a necessary condition.

Today, the 11.9% growth rate in the first quarter 2010, in conjunction with rising prices, are leading some to believe that it is time to revalue the RMB and/or make it more flexible. However, we show that finding a solution that offers both greater flexibility and monetary policy autonomy (controlling inflationary risk) is no easy feat and that a distinction should be made between flexibility and managed RMB appreciation.

We also believe that investment will slacken off (having already reached too high a level at almost 50% of GDP and some restraining measures have been already put in place) and that consumption will be unable to sustain the same dynamic level. China must thus rely on exports in order to achieve sufficiently high growth.

In view of the complexity of this exercise and the macroeconomic instability of China's economy, we do not believe that a shift in the exchange rate regime will come as promptly as the markets anticipate (+1.4% in 3 months being the consensus).

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