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Editor's note
There have been many hints in recent
months that China is considering a major
revaluation of the yuan, allowing it to strengthen
against the dollar. In the last few days, there
have been increasing indications that such a move
might be imminent:
At a meeting on May 10 between mid-level
banking officials of the US and China, US
officials emerged saying that there had been
"progress" on the revaluation issue
According to a May 9 report in the
Baltimore Sun on Asian financial markets, the
renminbi was actually allowed to float against the
dollar for about 20 minutes in late April,
although it is unclear if this move was a
technical lapse or a deliberate test
On March 14, Chinese Premier Wen Jiabao
acknowledged that Chinese officials are "working
on a plan" for revaluation
It has been reported in the Chinese press
that currency analysts with JP Morgan and ABN
Amro, among others, expect at least a 5-10% rise
in the yuan this year.
In the last few days,
Chinese government news services published an
unusually frank editorial (republished in Asia
Times Online on May 9, click here to read the
article) arguing that China
should reduce its dependence on foreign direct
investment. Because a reduction in FDI would be
one consequence of a revaluation, the editorial
may be part of a policy to prepare China's
population for the revaluation move, and avoid the
appearance of giving in to foreign pressure.
In
the following article from China's official news
service, bank officials claim that pressure to
revalue the yuan comes from domestic needs,
and warn against near-term speculation on the
yuan.
Revaluation not imminent: Vice
finance minister
BEIJING -
China's Vice Finance Minister Li Yong last week
said upward pressure on the Chinese yuan was "not
so great" and urged speculators betting on an
imminent revaluation to be patient.
At the
annual meeting of the Asian Development Bank (ADB)
in Istanbul, the minister told participants that
the pressure for the currency to appreciate
stemmed from domestic, not external, factors. "I
don't feel the upward pressure is that strong,
[and]...the pressure is not from the outside but
from domestic needs," he said. Li reiterated that
there is no timeframe for floating the yuan and
added that establishing market mechanisms and
pushing financial sector reform were prerequisites
for a change in the existing currency regime.
Some analysts say that rather than US
pressure, it is China's uphill battle to tame its
overheating economy that has increased the chances
of a long-awaited yuan appreciation this year,
which could spark a rally in Asia's carefully
managed currencies. Li said China would take into
account the impact on regional and global
economies of revaluing the yuan.
On May 4,
China's finance minister Jin Renqing said Beijing
was determined to reform its currency regime but
intense market speculation on the exchange rate
made it very difficult to move now. At the
Istanbul meeting, Li pleaded with speculators to
be patient. He said some speculators were buying
up yuan-denominated assets in the hopes that their
value would appreciate by as much as 40% in the
event of currency appreciation. "40% is
astonishing. I urge [against]...such speculation.
They need patience," he said. "One big concern to
me is that too much hot money is flowing into
China."
Speculation heats
up
Investors have been placing fresh bets
in recent days on a near-term appreciation of the
yuan even before Chinese central bankers met US
Treasury officials and bankers on May 9 to discuss
currency plans, traders said. The absence of top
Chinese central bankers from the Istanbul meeting
and their planned visit to New York has fueled
speculation that Beijing is set to move soon on
the yuan.
On May 6, Frank Gong of JPMorgan
said: "In my view, this Sunday [May 8] would be
the first golden opportunity for China to move.
It's a working day for China (the first work day
after the "Golden Week" holidays) when all the
other markets are closed... Domestic
markets/people can have the first chance to react
to the big news," he said in a research note. But
in fact, no appreciation materialized on May 8.
Meanwhile, three-month yuan
non-deliverable forward contracts, which investors
use to bet on any change in the yuan's value in
the near term, factored in a 2.5% appreciation on
May 6, compared with 2% the day earlier. The yuan
is pegged in a narrow band around 8.28 per dollar.
As the dollar has weakened over the last three and
a half years, the falling yuan has made Chinese
exports cheaper.
Li said China shared the
concerns of other countries about imbalances that
threaten the global economy. He said China would
spend part of its massive foreign exchange
reserves, the world's second largest at over
US$650 billion, to support its financial reforms.
"China will spend the necessary resources to
support reforms," he said, citing Beijing's past
decisions to inject capital into three state banks
as examples.
Asked if China's surging
economy could achieve a soft-landing, he told
Reuters: "That is certainly achievable." Li also
said Beijing would continue adjusting its
macroeconomic policies as it tries to cool its
economy, which grew at a sizzling 9.5% in the
first quarter of 2005. "[2005] Priority is to
strengthen and improve macroeconomic management.
We will continue our macroeconomic adjustment,
which is so important for steady growth."
(Asia
Pulse/XIC) |
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