Free flow of capital between international and domestic markets is either made possible by strict market-access standards and qualified foreign and domestic institutional investor regimes, or prohibited.
In other words, the markets of the renminbi and hard currencies are separated from one another, and free flow between the Chinese currency and its foreign counterparts remains impossible. As a result, the fluctuation in interest rates cannot be translated into real leverage in this respect via pricing mechanisms.
If the exchanges between the markets of the renminbi and hard currencies remain free, for example, the spree of buying hard currencies should have happened when the interest rate of the US dollar was raised again and again over the past few years.
But nothing happened in the country insofar as selling renminbi to buy US dollars was concerned. This largely brings home the reality that the renminbi and foreign currency markets are insulated from each other.
In addition, the US Federal benchmark interest rate has reached 5.25 per cent as a result of 17 interest-rate hikes in recent years. The interest-rate difference between the renminbi and US dollar is roughly 2.7 per cent if we treat the Chinese's currency's one-year deposit interest rate as the benchmark, which stands at 2.52 per cent after the latest hike. This far outstrips the 1.6 per cent margin by which the Chinese currency has been revaluated over the past year or so.
If the margin by which the renminbi appreciates does not outstrip the interest-rate difference between the Chinese currency and the US dollar, the speculation betting on the renminbi's revaluation would be rendered unprofitable. In this scenario, the latest interest-rate rise would have little impact on the renminbi's appreciation.
Also, the domestic financial market remains far inferior to the international monetary market in terms of investment tools and return rate for investment. The return rate for the one-year treasury bond in China, for instance, is below 2 per cent, in contrast with the much bigger 4.5 per cent return rate offered by US treasury bonds.
