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Global Research

China’s Dilemma China will approach renminbi reform

step by step...
Options for the renminbi
...but will the steps be small or, instead,
giant leaps?

We assess the options open to the

Chinese authorities and their
implications for the global economy

Which option is best?

The speculation may, eventually, amount to nothing at all
but, for the time being, markets are obsessed with what
China may – or may not – do about its exchange rate regime.

This piece is an update of the arguments presented in “To Be

a Rock and Not to Roll” (January 2005). Our assumption
remains that the Chinese authorities will focus primarily on
domestic financial reform with only limited changes likely to
the exchange rate regime in the coming months.

Nevertheless, given the ongoing speculation – and the

heightened pressure stemming from the US Treasury and
Congress - we take a quick look at the alternative exchange
rate arrangements on offer, both in the form of one-off
changes in value against the dollar and more strategic
changes in currency regime.

Demands for a one-off revaluation against the dollar are

likely to fall on deaf ears in Beijing. A small revaluation
20 May 2005 would achieve very little yet threaten greater ongoing
Stephen King instability. A large revaluation would be too much a victory
Economist for the Americans and probably wouldn’t do the trick longer
+44 20 7991 6700 stephen.king@hsbcib.com
term: declines in Chinese wages and prices would imply a
Janet Henry
rapid restoration of China’s competitive advantage.
Economist
+44 20 7991 6711 janet.henry@hsbcib.com
More plausible options include a crawling peg and a
Qu Hongbin currency basket. In both cases, China wouldn’t have to
Economist
+852 2822 2025 hongbinqu@hsbc.com.hk suffer a sudden exchange rate shock, in both cases the
regime would be relatively transparent and in both cases the
Richard Yetsenga
Currency Strategist Chinese could argue that more flexibility had been
+852 2822 1933 richard.yetsenga@hsbc.com.hk introduced into the regime. Neither option, though, would
necessarily require a large adjustment against the dollar or,
Disclaimer and Disclosures indeed, against any other currency.
This report must be read with the
disclaimer, disclosures and analyst
certifications on p11 that form part of it
 Macro
Global Economics abc
20 May 2005

China’s Dilemma
Any renminbi reform is likely to be limited...
...and US hopes of a large revaluation against the dollar are
unfounded.
Small steps, not giant leaps, will remain the Chinese leadership’s
preferred approach

Speculation and truth revaluation will be going from 1.26 to 6.03

percent in a span of one month and one year......”.
In “To Be a Rock and not to Roll”, we argued that
On the very same day, the Deputy Governor of
many of the arguments used in favour of a
the People’s Bank of China (PBOC), Wu Xiaoling
renminbi revaluation did not stand up to close
in an interview with the Nikkei said that while
scrutiny. In particular, a renminbi appreciation
China is “technically” ready for yuan reforms
was unlikely to make much difference to the
“China’s reform is not proceeding under external
economic imbalances that exist around the world,
pressure. If expectations that the yuan will
notably the growing size of the US current
appreciate grows and a large amount of foreign
account deficit. We also argued that some of the
capital flows into the country, it will be difficult to
proposed changes to the current regime – a peg
push forward the macro-economic policies”.
against the dollar – would pose risks for China,
threatening economic instability. Given these seemingly rather different views, it’s
hardly surprising that speculation refuses to die
Regardless of our views, however, speculation
down particularly given that, if China were to
continues to mount that a change in China’s
make a change now, it would be doing so from a
renminbi policy is imminent, despite the
position of strength not often afforded to a rapidly
occasional – and sometime forceful – claims to
expanding emerging market: the currency is under
the contrary from Chinese officials. In part, this is
upward pressure and the trade surplus has been
because stories emerging from China have, from
rising rapidly in recent months. Ultimately,
time to time, been contradictory. On 10 May, a
though, all we know at this stage is that China has
story posted on the English language website of
agreed to “push forward market-oriented
China’s People’s Daily – now discredited as an
exchange rate system reform. Our objective is
inaccurate translation but enough to create
very clear. But we have our own plan for the
headlines around the world - claimed that “.the
sequence and order of the reform. We will
appreciation of the people's currency as wished
implement the reform step-by-step according to
for by the international financial market will be
China’s own conditions” (Zhou Xiaochun,
announced to revaluate or expand the margins of
Governor of the PBOC, speaking in April).
its exchange rate and the estimation of the

2
 Macro
Global Economics abc
20 May 2005

Reforms are certainly on the way, but the 1. RMB has been stable since early 1990s

sequencing of reforms – and the position of Chinese Renminbi to US$

10 10
exchange rate policy within those reforms – is still
a matter for considerable debate. 8 8

This short paper reviews the possible currency
regime options open to China, and highlights their
implications both for China itself and for other
economies. It’s worth noting at the outset that
any decision made by the Chinese carries
economic risk but that the decision will ultimately
be based not only on economic factors but on
6 6
4 4
2 2
0 0
57 61 65 69 73 77 81 85 89 93 97 01 05
Source: Thomson Financial Datastream

political factors as well. Chinese Premier Wen

Jiabao said on 16 May in comments to a US
Option 1: Leave the renminbi
Chamber of Commerce delegation, “Currently,
there are some problems in Sino-US trade. The
unchanged
problems should not be politicised. Reform of the Given the increased hostility both from the US
renminbi’s exchange rate is a matter of China’s Congress and Administration, this would hardly
own sovereignty. Any pressure or media play-up be welcome in Washington. Nevertheless, as we
will not help solve problems”. argued in To Be a Rock and Not To Roll, an
unchanged policy has substantial attractions for
Despite these comments, however, the pressure
China. Transparency is maintained. Intervention,
continues to mount. In the US Treasury’s latest
if needed, has limited side-effects domestically
“Report to Congress on International Economic
(China could intervene indefinitely: the Chinese
and Exchange Rate Policies” (May 2005),
issue domestic bonds to mop up excess liquidity
“current Chinese policies are highly
associated with rising foreign exchange reserves
distortionary....if current trends continue without
but yields on those bonds are lower than yields on
substantial alteration, China’s policies will likely
US Treasuries, implying no negative carry). And
meet the...requirements for designation [as a
intervention is working: money supply growth has
currency manipulator]”. The report went on to
slowed significantly over the last twelve months
say that “it is widely accepted that China is now
despite the rapid increase in foreign exchange
ready and should move without delay in a manner
reserves.
and magnitude that is sufficiently reflective of
underlying market conditions”. Although John
Snow, the US Treasury Secretary, indicated after
the report’s release that there was no need for an
immediate free float, indications from the
Treasury were that a substantial move was
required and that a 5% revaluation would not
satisfy US interests nor quell rising protectionist
pressures in Congress. As yet, then, there appears
to be no meeting of minds between China and the
US.

3
 Macro
Global Economics
20 May 2005
2. Money supply growth slowing despite rising FX reserves
% Yr % Yr
25
20
15
10
5 5
99 00 01 02 03 04 05
M1 M2
Source: Thomson Financial Datastream
There is also huge uncertainty about the
renminbi’s fair value. Most calculations - which
point to the need for renminbi appreciation - are
based on trade flows alone. Yet, were the capital
account to be fully liberalised, the weak domestic
banking system could lead to a significant
depreciation of the renminbi. In 2004, for
example, the IMF was forced to conclude that it
was difficult to tell where the renminbi would end
up were it to be floated (see “China’s Integration
into the World Economy: prospects and
challenges”.) It is, therefore, difficult to come up
with a convincing assessment of where the
renminbi should be if there were to be a shift in
the parity.
One of three possible reforms might be needed to
continue fixed currency policy against the dollar.
4 First, China would need to find another
mechanism to secure appreciation of the real
exchange rate over the medium term (the real
exchange rate, in its simplest form, takes into
account movements in both the nominal
exchange rate and relative inflation rates). The
most obvious thing to do would be to announce
publicly that China’s inflation rate will be
higher over the medium term than the US
inflation rate, implying a continuous terms of
trade improvement for Chinese consumers (in
their eyes, US goods, priced in renminbi,
4
abc
would become cheaper and cheaper as Chinese
nominal wages rose relative to US nominal
25 wages).
20 4 Second, rather than introducing flexibility into
15 either the nominal or the real exchange rate,
China could use fiscal levers to change the
10
relative pricing structure of exports: higher
taxes or the withdrawal of subsidies would
work in much the same way as an appreciation
of the nominal exchange rate but would be
directly controlled by the Chinese
administration. This approach would have
immediate effects but, at the same time, has
two key disadvantages. Any change in tax
arrangements might be a tacit admission that
the exchange rate was, indeed, undervalued.
And manipulating fiscal policy, in itself, cannot
really be regarded as a market-led reform
unless there is a general reduction in tax
distortions.
4 Third, China might rebalance its capital
account position, placing constraints on capital
inflows yet, at the same time, encouraging
more capital outflows. Current regulations
require exporters and foreign investors to
surrender at least 70% of their foreign currency
earnings and investment to clearing banks,
while banks have to sell most of their foreign
currency receipts on the foreign exchange
market. Yet the demand for foreign currency
(except imports) remains depressed due to the
rigid control over overseas investment, the
foreign currency holdings of corporations
(including banks) and purchases of foreign
currency by individuals. Rebalancing the
capital account would reduce the need for
continuous intervention to prevent renminbi
appreciation.
Implications: A fixed renminbi, with reform,
would be easy for China to absorb but would do
nothing to allay US protectionist pressures.
 Macro
Global Economics
20 May 2005
Whether the US would proceed with import tariffs
is, of course, another matter altogether, but this
option would certainly increase political tension,
even if the economic attractions for China seem
relatively high. Moreover, were the dollar to
weaken further against other currrencies, the
renminbi’s own competitive position would
improve, perhaps increasing trade tensions with
other parts of the world.
Option 2: Allow a small
revaluation of the order of
3-6% against the dollar
This is the event implied by pricing on non-
deliverable forwards, which anticipate a 6% rise
in the renminbi against the dollar over the next
twelve months. It could take the form of either a
one-off revaluation or a widening of the band to
3%-6% from 0.03% currently. A move of this
scale might contain some political symbolism but,
economically, it would be, at best, largely
irrelevant and, at worst, seriously destabilising.
Note that China accounts for around 10% of all
US trade so a 6% renminbi appreciation would, on
its own, imply a decline in the dollar’s trade-
weighted exchange rate of a mere 0.6%. Even if
all other Asian countries were to follow suit –
and, given Japan’s economic weakness, this may
be an extreme assumption – the dollar would only
fall in trade-weighted terms by around 2½%.
Moves of this scale will have no significant
impact on external imbalances. In particular, the
US current account deficit would continue to
widen. Protectionist pressures might be put on
hold for a while but would likely return at some
point over the next couple of years.
Perhaps the bigger issue is whether a move of this
size would mark the end of any adjustment. The
breakdown of the Bretton Woods exchange rate
system in the early-1970s was initially associated
with a small realignment of currencies against the
abc
dollar as a result of the Smithsonian agreement in
December 1971, itself a response to President
Nixon’s decision to impose import tariffs on other
Bretton Woods members in August of that year.
The appreciation, though, proved to be a
speculator’s dream – and a policymaker’s
nightmare. The adjustment was a clear
compromise between those countries that wanted
no change and the Americans who wanted a much
more substantial move. More moves were
expected and, as a result, speculators began to
take advantage of a system that was no longer
completely fixed but, instead, unpredictably
adjustable. By 1973, the system had completely
collapsed.
Implications: In current circumstances, it is
difficult to believe that there would be any serious
benefit to either the Chinese or to the Americans.
The move would be no more than cosmetic,
designed to buy time, but could have the
unfortunate consequence of creating even more
speculative pressures than exist today. Small
adjustments generally don’t work when there is
great deal of speculative pressure. In Indonesia in
1997/98, for example, the authorities initially
attempted to slow the pace of the currency’s
depreciation by widening the intervention band
from 8% to 12% but speculative pressure
intensified and the exchange rate immediately fell
to its new lower boundary. The currency changed
to a float in a matter of weeks. Similarly, in
Mexico in December 19994 the initial 15%
devaluation did little to curb speculative selling
and the currency was floated two days later. It
seems unlikely that a revaluation of 3%–6%
would quell the current speculative pressure on
the renminbi.
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Global Economics
20 May 2005
Option 3: Allow a large
appreciation of around 20%
against the dollar
The least plausible option. A large appreciation
might keep US politicians happy for a while but it
wouldn’t do much for the Chinese economy.
Falling import prices, the result of a large
appreciation, would boost domestically based
investment in exchange for lower exports and,
therefore, might lead to an even bigger domestic
imbalance than China already has (for a parallel,
think of Japan’s experience in the late-1980s
where substantial yen appreciation was
accompanied by severe domestic overheating).
Lower demand for Chinese exports might, in turn,
prompt wage and price cuts which would quickly
restore the real exchange rate to earlier, more
competitive, levels.
For state-owned companies, many of whom
operate on razor-thin margins given their
employment-maximising rather than profit-
maximising approach, even a short-term loss of
competitiveness would be likely to reduce profits
or increase losses. This would have negative
implications for the state-owned banks –
particularly their non-performing loans - and
government finances.
China’s inflation would probably fall, although
the government could take the opportunity to
accelerate the deregulation of prices of oil and
other products, thereby allowing some of the so-
called “hidden” inflation to come through and
reducing some of the effective subsidy which has
encouraged over-investment in recent years.
There would also be difficulties for Hong Kong
SAR. A rise of 20% in the renminbi would take it
above the HK$7.75 upside limit set by the Hong
Kong Monetary Authority and could encourage
speculation on the Hong Kong dollar as well,
6
abc
leading to distortions to Hong Kong monetary
policy that could destabilise the economy there.
Implications: This kind of revaluation would
almost certainly be associated with an
appreciation of the managed floating exchange
rates in Asia (particularly the yen) although
probably not all of the fixed rates (Malaysia
would probably move but others wouldn’t). A
large one-off revaluation would probably also
imply a less marked appreciation of the euro
against the dollar than would otherwise have been
the case. As for the emerging European
currencies, a renminbi revaluation would not have
any significant direct implications; movements in
euro/dollar would remain the major influence.
Even if there is no appreciation vis-à-vis the
dollar outside China it seems unlikely that even a
revaluation of this magnitude would narrow
China’s huge labour cost advantage significantly
over the medium term. Moreover, while a 20%
revaluation would satisfy the US initially, it
would not fulfil either US demands, or China’s
stated intention, to move towards increased
“flexibility” of the exchange rate at some stage.
Option 4: A currency basket
target
One of the more plausible scenarios. Pegging the
exchange rate to a number of different currencies,
rather than just the US$ basically amounts to a
stabilisation of the effective exchange rate which
would insulate the currency from external
exchange rate shocks. Linking the exchange rate
to a basket of currencies may or may not be
associated with a one-off
appreciation/depreciation of the effective rate.
One key difficulty is determining the optimal
weights for such a basket. Should it be based on
different countries’ share of China’s exports? Or
its imports? Or both? Should it also incorporate
currencies from those countries with which it does
 Macro
Global Economics abc
20 May 2005

not have a large amount of direct trade but with Implications: A currency basket would provide a
which it competes? Should the basket make more economically rounded and relevant target
allowances for commodities priced in dollars, or for the Chinese authorities to aim at. However, it
for the sources of capital flows? And what of the would introduce uncertainty into all bilateral
rapid change in China’s trade shares from one currency arrangements whereas at least there is
year to the next? currently certainty with regard to the dollar. Such
a regime would presumably only satisfy the US
Table 3 lists China’s major trading partners based
authorities as long as the dollar is perpetually
on total trade shares. If one assumes that any shift
falling; if the euro and/or yen weakened in value
to a currency basket in China is not accompanied
this would obviously imply a renminbi
by a regime change in other Asian exchange rates
depreciation vis-à-vis the US dollar.
currently pegged or managed against the US
dollar, these weights would basically imply that
the US dollar would have about a 55% weight in Option 5: A crawling peg
the currency basket, the euro 20% and the yen A crawling peg allows the government or central
15%. bank to adjust the value of the exchange rate peg
periodically, typically based on past inflation
3. China’s main trading partners: share of total main partner
trade (2004) differentials vis-à-vis major trading partners. In
Country/region Share (numbers add to 100) countries where this regime has been used in the
EU 21.5 past (e.g. Israel, Poland and Hungary) it has
US 17.2
Japan 17.0 typically been to engineer a gradual depreciation
Hong Kong 11.5 of the exchange rate.
Korea 9.1
Taiwan 8.0
4. A crawling peg appreciating by 6% per annum
Singapore 2.7
Malaysia 2.7
Russia 2.2 8.5 8.5
Australia 2.1
Thailand 1.8
Renminbi/US$
Renminbi/US$

Canada 1.6 8.0 8.0

Indonesia 1.4
Philippines 1.4
7.5 7.5
Source: Thomson Financial Datastream

7.0 7.0
Like the crawling peg (see below), a currency
basket has been used by some countries as part of 6.5 6.5

a transition from a peg to a floating regime. From t-2 t-1 t t+1 t+2 t+3

1973 to 1985 Singapore pegged the Singapore
dollar against a fixed and undisclosed trade-
weighted basket of currencies. Capital controls
were fully abolished in 1978 and since 1985 the
currency has been allowed to float. But it is
monitored by the Monetary Authority of
Singapore against a currency basket (known to be
based on exports, imports and third country
competitiveness) with the aim of maintaining a
low and stable domestic inflation rate.
Source: Thomson Financial Datastream
In the case of China this would presumably take
the form of allowing the renminbi to appreciate
against the dollar at a pre-announced rate (see
chart 4 for an illustrative example).
A crawling peg has often been used in countries
as part of the transition from a fixed peg to a
floating regime and to that extent would probably

7
 Macro
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20 May 2005

be more likely to appease the Americans than just
a one-off 3-6% revaluation. Not only would it be
a commitment to a more medium-term adjustment
of the exchange rate, rather than just a one-off
revaluation, it would probably also be viewed as
the start of a shift to much greater exchange rate
flexibility.
5. A peg within symmetric crawling bands
8.5
peg. Would it end the speculation pressure?
Probably not. Obviously much would depend on
the rate at which the crawling peg moved but
assuming it is a fairly modest annual appreciation,
many of the arguments set out in “Option 2: Allow
a small revaluation of the order of 3-6% against
the dollar” apply here also. Unless the US
welcomed the change as the appropriate stepping
stone to a complete liberalisation of the Chinese
8.5 foreign exchange market, speculation might
Renminbi/US$

8.0 8.0 persist about shifts in the pace of managed

Renminbi/US$

7.5 7.5
appreciation.

7.0
6.5
6.0
t-2 t-1 t t+1
Pegged rate
Source: Thomson Financial Datastream
A variation on the crawling peg regime would be
a pegged exchange rate within crawling bands.
Bands could be either symmetric around a
crawling central peg (which strengthens at a pre-
announced rate) or widen gradually within
asymmetric upper and lower bands allowing for
different degrees of appreciation (in which case
there would probably not be a pre-announced
central rate).
6. Crawling peg within asymmetric bands
8.5
7.0
Option 6: A managed float
6.5
A managed float would have some similarities
6.0
with both currency basket and crawling peg
t+2 t+3
2% pa 4% pa arrangements. There would be no pre-announced
trading ranges, nor pre-announced targets for
levels of the exchange rate in a year or two’s time.
Nor would there have to be an announced
currency basket target. Markets, though, would
be able to observe the performance of a managed
float over time and learn something about the
authorities’ reaction function. After a while, it
would be possible for markets to “second-guess”
how the authorities would react to different
shocks. This “learning process” would, over time,
imply that markets would look upon a managed
float in a similar – although slightly less certain –
way to either a currency basket or crawling peg.
8.5 The main advantage would be the absence of any
formal target for speculators to attack. The
Renminbi/US$

8.0 8.0
disadvantage, at least at this stage, might be the
Renminbi/US$

7.5 7.5
lack of a transparent monetary target in the
7.0 7.0
transition to a more market-based financial
6.5 6.5 system, fostering uncertainty along the way.
6.0 6.0
Implications: A managed float has proved popular
t-2 t-1 t t+1 t+2 t+3
with a number of Asian countries – India, Japan
Current rate 2% pa 8% pa
and Taiwan spring to mind – but it might be a step
Source: Thomson Financial Datastream
too far for China given limited domestic reforms.
Implications: A crawling peg basically imposes
A managed float might be the eventual outcome
the same constraints on monetary policy as a fixed

8
 Macro
Global Economics
20 May 2005
after years of reform but we suspect that currency
basket or crawling peg arrangements would be
more credible short-term stepping stones.
Option 7: A freely-floating
exchange rate
Following the Asian and Russian crises of the
late-1990s a new consensus emerged that either
“firmly fixed” or “fully floating” exchange rates
were the only workable options as pegged
exchange rates of the adjustable sort were no
longer viable because of their vulnerability to
speculative attacks. So, to that extent, a free float
would be the obvious alternative to the current
regime. However a free float would require an
alternative credible domestic monetary
arrangement such as an inflation target or money
supply target which clearly does not yet exist in
China. Moreover, given the limited degree of
domestic financial market reform, the credibility
of any such domestic nominal target would be in
serious doubt: the link between interest rates and
money supply is poor, primarily because
monetary policy is still conducted through
quantitative restrictions on credit expansion rather
than price.
A free float would also have to be associated with
full capital account liberalisation. Alan Greenspan
has pointed out on several occasions that the
existence of capital controls means no one really
knows what would happen to the RMB in the
event of a freely floating Chinese exchange rate.
However, it seems plausible under current market
conditions that the renminbi would appreciate
sharply, overshooting – at least temporarily –
most measures of fair value. Fair value for the
renminbi is itself a moot point with estimates
varying widely. An IMF report (Article IV
Consultation with the People’s Republic of China)
published in November 2003 found "no clear
evidence that the currency is substantially
abc
undervalued”. Others disagree. The Institute for
International Economics in Washington used two
different approaches to argue that the renminbi is
15-30% undervalued, but admitted that these
calculations took no account of the likely capital
outflow that might be associated with
liberalisation of the capital account.
Implications: The surge in capital inflows that
would be associated with such an appreciation
could cause serious disruptions to China’s
financial system and real economy, though the
Chinese authorities could impose credit controls
on banks to prevent a lending surge. The
implications of the initial appreciation would be
an exaggerated version of those described under
“Option 3: Allow a large appreciation of around
20% against the dollar”. Such a move would
result in a rise in US treasury yields, particularly
if associated with a switch within the rest of the
Asian region towards free floats or pegs other
than the dollar. If the move reflected in part the
US dollar starting to lose its reserve currency
status it could also trigger a switch by commodity
producers to price their commodities in euros
rather than dollars and lead to a generally higher
risk premium on all US assets.
And while the initial impact of a free float could
be negative for China, a subsequent reversal of
capital flows could be equally disruptive, leaving
this option as the most risky and least likely for
the Chinese authorities to consider.
Option 8: Asian currency unit
A much longer term option, which would
probably only happen after much of the region has
shifted to more flexible exchange rate regimes,
would be the re-pegging to either a common
regional currency basket or a synthetic new
currency (Asian Currency Unit). This would have
the advantage of reducing concerns about
competitive devaluations and avoid the current
9
 Macro
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20 May 2005

situation whereby other Asian economies,
including Japan, use China’s lack of currency
flexibility to justify their own currency
intervention. It also makes sense given the
increased importance of intra-regional trade.
However, there would also be political difficulties
in its implementation, particularly if it were to
involve the formation of some kind of Asian
central bank.
Implications: Still a long way off and a lot would
have to change politically to make it happen.
Would present challenge to the dollar and the euro
as a reserve currency.
Conclusions
Conditions for a change in currency regime are
certainly more helpful than they were a year ago.
The balance of payments position is strong – an
auspicious backdrop – and there have been a
number of changes that have improved the
institutional structure of the domestic foreign
exchange market:
4 Eliminating regulations that stifle trading
activity, allowing exporters to retain more
foreign exchange earnings.
4 Allowing more flexibility in the cash
management of foreign companies operating in
China.
4 Encouraging companies to make long-term
investments in foreign markets.
4 Permitting local residents to buy foreign
currency for both foreign education and
holidays.
were to be a shift in the regime, the shift would
more likely be one of mechanism rather than
magnitude. Given the huge uncertainties about
the renminbi’s fair value against the dollar and
other currencies, a one-off revaluation doesn’t
look likely. Instead, any change is more likely to
focus on band widening, a crawling peg, a
currency basket target or some combination of all
three. (It is worth noting that Chile used all of
these at various stages in the 1980s and 1990s to
achieve both exchange rate appreciation and
depreciation.) Changes of this kind would
certainly introduce greater flexibility into China’s
foreign exchange market but, on their own, would
provide no guarantee of any sizeable change in
China’s competitive position vis-à-vis the United
States.
As a result, external imbalances would be only
modestly affected by any changes in Chinese
exchange rate arrangements. As we have
consistently argued, for any meaningful reduction
in the US current account deficit something has to
change with regard to relative demand growth in
the US and elsewhere in the world. Any long-term
solution to the current account deficit would have
to involve a sustained period of US fiscal
consolidation and a commitment to greater
structural reform in the eurozone. Greater
currency flexibility in Asia may help modestly but
would have to be accompanied by a policy-shift
towards domestic-demand-boosting policies and a
willingness suddenly to run massively-reduced
current account surpluses if not deficits. In the
meantime, protectionist pressures seem unlikely
to die down.

Hopes, though, of a revolutionary shift are

overdone. Further reforms could come without
any shift in the currency regime: a higher inflation
target, changes in the restrictions on capital
inflows and outflows, or changes in the fiscal
treatment of imports and exports. And if there

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 Macro
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20 May 2005

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2005) MITA (P) 105/10/2004

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Global Economics Team

Global Global Emerging Markets
Stephen King Philip Poole
Global Sector Head +44 20 7991 5237 philip.poole@hsbcib.com
+44 20 7991 6700 stephen.king@hsbcib.com
Asia
Janet Henry Arup Raha
+44 20 7991 6711 janet.henry@hsbcib.com +852 2822 4870 arupraha@hsbc.com.hk
Europe George Leung
+852 2822 4871 georgeleung@hsbc.com.hk
Gwyn Hacche
+44 20 7991 6707 gwyn.hacche@hsbcib.com Qu Hongbin
+852 2822 2025 hongbinqu@hsbc.com.hk
Robert Prior-Wandesforde
+44 20 7991 6708 robert.prior-wandesforde@hsbcib.com Arthur Woo
+852 2822 2096 arthurwoo@hsbc.com.hk
United Kingdom
John Butler Vasan Shridharan
+44 20 7991 6718 john.butler@hsbcib.com +65 6239 0803 vasanshridharan@hsbc.com.sg
Vinay Patel
United States
+91 22 2268 1245 vinaypatel@hsbc.co.in
Ian Morris
Emerging Europe, Middle East & Africa
+1 212 525 3115 ian.morris@us.hsbc.com
David Lubin
Ryan Wang +44 20 7991 5641 david.p.lubin@hsbcib.com
+1 212 525 3181 ryan.wang@us.hsbc.com
Arthur Kamp
Japan +27 11 481 4365 arthur.kamp@za.hsbc.com

Peter Morgan Ahmet AkarlÖ

+81 3 5203 3802 peter.morgan@hsbc.co.jp +90 212 366 1625 ahmetakarli@hsbc.com.tr
Latin America
Paulo Vieira da Cunha
+1 212 525 5741 paulo.vieiradacunha@us.hsbc.com
Benito Berber
+1 212 525 3124 benito.berber@us.hsbc.com
Javier Finkman
+54 11 4344 8144 javier.finkman@hsbc.com.ar
Alexandre Bassoli
+55 11 3371 8304 alexandre.bassoli@hsbc.com.br
Jonathan Heath
+52 55 5721 2176 jonathan.heath@hsbc.com.mx