To make matters more complex, it is very hard for overseas funds to access, say, the domestic stock and real estate markets, in view that strict control is imposed on the entry of overseas money into the domestic market. This is evidenced, for example, by the government's newly issued circular that bans speculation on housing by overseas capital.
Some people believe that the market's expectation of a renminbi revaluation is likely to be subjected to the influence of macroeconomic regulation. Following this logic, the market anticipates that the central bank would finally resort to the foreign-exchange tool to speed up the appreciation of the Chinese currency in case the interest-rate hike proves unable to brake the bank loans' increase and rebound of investment. In other words, revaluation also constitutes a primary tool in putting a brake on the fast expansion of bank loans.
This author has time and again emphasized that the pressure for the renminbi's appreciation comes from institutional defects in the country's foreign exchange system and economic disequilibrium internationally.
In view of this, it is imperative to bring about effective mechanism of the renminbi's exchange rate, increase its resilience and flexibility and gradually liberalize the control on fluctuation margins between the Chinese currency and the US dollar.
Overall, interest-rate hikes are the most effective means of macroeconomic co-ordination and regulation. The influence of this on the renminbi's appreciation is insignificant. While the theory that the rise in the renminbi's exchange rate can put a brake on the overheating of the Chinese economy sounds plausible, it will do harm to the economy when put into practice.
The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.
