Bao Yinsheng, Chief Market inspector of Guoyuan Securities, has analyzed an odd trend — the renminbi is appreciating against the U.S. dollar but depreciating in China.

An odd conundrum.

Bao Yinsheng said two factors have resulted in the appreciation of the renminbi against U.S. dollar — the renminbi is not convertible not has it yet become an international reserve currency.

The money pouring into China from abroad contributes to an excess of liquidity that causes a surge in prices, leading to the depreciation of the renminbifor people in China.

The renminbi has appreciated nearly 11.95% accumulativelysince China depegged it from the U.S. dollar in July 21, 2005. In the meantime, Chinese people at home are obviously feeling their purchase power declining due to the rise in price of things ranging from meat and grain to equity and real estate.

The Consumer Price Index (CPI), an indicator of key inflation, climbed to a 11-year high of 6.9% in last November, mainly driven by soaring daily necessities.

According to the chief economist of the National Bureau of Statistics (NBS), China’s trade surplus hit $238.1 billion from January to November, higher than the $177.5 billion recorded in 2006.

Money from overseas is likely to be attracted to China by an anticipated appreciation of the renminbi and continued gains in the stock and real estate markets. The inflow of hot money into China’s asset market is destined to help drive up the RMB exchange rate.

China is not able to invest in the international market directly with the RMB or purchase required materials there. The country has to change its currency into the U.S. dollar or other convertible money to conduct international trades and investments.

To solve the problems of declining purchase power, and to burst the domestic asset bubble, according to experts, the Central Government should, first of all, adopt measures to streamline asset prices, elevate people’s income levels, and increase export prices. At the same time, it should strengthen its supervision of the influx of speculated funds overseas.
Source: Shanghai Securities