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Time not ripe for
revaluation
By Alexis Chui
HONG KONG - The rumors are flying thick
and fast that the Chinese yuan will soon be
revalued. But some economists insist that now is
not the right time to appreciate the yuan, because
doing so will work against Beijing's efforts to
cool off a property development boom and
commercialize state-owned banks.
Since
1994, the yuan has been rigidly pegged at around
8.28 to a US dollar. But pressure for a stronger
yuan has been incessant. On May 9, the US Treasury
Department discussed the feasibility of floating
the yuan in Washington with a Chinese central bank
delegation. In a live televised interview three
days earlier, US Treasury Secretary John Snow
stated that China had pledged to embrace a more
flexible foreign exchange rate, adding that he
expected Beijing to put its words into action at
the soonest possible time. The US pressure has
triggered wild speculation on just one question:
how soon will the revaluation occur?
Many
believe that the yuan will definitely be revalued
eventually, but Beijing has not specified an
official timetable. At the closing of the third
plenum of the 10th National People's Congress on
March 14, Chinese Premier Wen Jiabao told the
press conference that revaluation would come as a
"big surprise". It seemed to many that the
surprise had arrived earlier than expected when
the Hong Kong Economic Journal quoted Frank Gong,
managing director of the Asia/Pacific Region and
chief economist with JP Morgan Chase & Co, as
saying that Beijing would diversify the foreign
currencies allowed in forex dealings as early as
May 4 and would very likely make adjustments to
the existing currency regime on the same day. But
May 4 came and went with no action.
Recent
signs show that refugee capital had begun flowing
into Hong Kong to speculate on a yuan appreciation
even before the Economic Journal report was
released. And the influx is still persisting,
according to Joseph Yam, chief executive of the
Hong Kong Monetary Authority.
Nevertheless, the time is not yet ripe to
float the yuan, said Paul Tang, a chief economist
with the Bank of East Asia. A slowdown in the
red-hot mainland property market is a prerequisite
to loosen the decade-old peg, he pointed out, but
the mainland property market has not completed its
intended "soft landing". If the yuan appreciates
in value at this time, this will re-inflate real
estate prices, the hot money influx will increase,
and as a result, Beijing's macroeconomic leverage
will be reduced, Tang explained.
Cooling
off the domestic real estate industry has been a
top policy priority for the government this year.
At a routine State Council meeting in April,
Premier Wen Jiabao vowed to cap excessive real
estate speculation with diverse and comprehensive
measures. Also high on Beijing's agenda for 2005
is to get two giant state-owned banks - the Bank
of China and the Construction Bank of China -
successfully listed in overseas bourses, Paul Tang
said, adding that an exchange rate reform at this
time is incompatible with these plans. This is
mainly because a yuan revaluation would heavily
reduce the value of US debentures owned by Chinese
banks, said Francis Lui, Economics professor and
director of the Center for Economic Development at
the Hong Kong University of Science and
Technology. For many years, the Chinese banking
system has bought huge amounts of US bonds, and
these bonds will depreciate if the yuan
strengthens against the US dollar, an outcome
unfavorable to the banks which the government
intends to list this year.
The extent to
which the RMB will be revalued - if it is revalued
at all - is up to China's central bank rather than
the market, Professor Lui added. From a financial
markets perspective, the yuan has been underrated
by 5-6%; but in terms of purchasing power parity,
it should be valued at triple its current forex
value. In professor Lui's opinion, the central
government is now in a dilemma about the yuan peg
policy: if the currency is appreciated to a record
high at one stroke, the abrupt shift may engender
economic dislocation; but if it is done step by
step, it will be impossible to prevent
speculation.
Paul Tang anticipates that
the yuan-dollar peg will not be loosened until at
least the end of the year. Despite expectations
from the US and the EU, it is not urgent to reform
China's foreign exchange policy right now, he
said. Furthermore, after breaking news reports
forecast a yuan reappraisal on May 18, the torrent
of speculation did not materialize to the extent
expected. This is a strong indication that
speculators are alert to the mounting risks of
taking a yuan position before an official
revaluation timetable is released, said Herbert
Lau, an investment director at Celestial Asia
Securities Holdings Limited.
Without a
doubt, the mainland's ever-expanding exports will
bear the brunt of any appreciation in the yuan.
Pursuant to the May 10 report conducted by China
National Statistics Bureau, if the yuan rises by
3-5%, the rate of export earnings growth will fall
to less than 10% this year, far below its 35.4%
growth rate in 2004. A recent Morgan Stanley study
also confirmed that Chinese exporters would suffer
losses, but large retailers would be able to
transfer part of the losses to manufacturers or
customers. According to the study, a stronger yuan
will deal a blow to exporters based in the Chinese
mainland, since they calculate proceeds in US
dollars but costs in yuan.
For instance,
Fountain Set Holdings Limited, a domestic textile
magnate, will lose some 4% of its annual profit
for every 1% the yuan is hiked. By comparison,
MasterKong, a gargantuan supplier of instant
noodles and soft drinks, will see its annual
profits increase by 4% under the same conditions,
since the company reckons part of its costs in US
dollars.
Demands for a yuan appreciation
were first heard in the US in early 2002, when
labor groups coupled with the Association of
Textile Manufacturing Industry urged presidential
candidates to take a hardline trade policy towards
Beijing, arguing that the undervalued yuan was a
major cause of America's gaping trade deficit and
the loss of over 1.5 million jobs in the US
manufacturing sector. Statistics show that between
2000 and 2003 the US trade deficit with China
jumped by 48% to $124 billion, reaching 25.3% of
the total US trade deficit.
However,
various scholars and academics maintain that the
yawning US trade deficit is an outcome of changes
in trade patterns within the Asia-Pacific region.
In the last decade, many manufacturers have moved
their low-technology production bases to the
Chinese mainland in a bid to lower production
costs. The effect was that many goods that
formerly would have counted as exports from South
Korea, Japan and Taiwan were added to the Chinese
total, artificially inflating Chinese export
numbers. In support of this view is the fact that
the US trade deficit with other Pacific countries
has fluctuated within a comparatively narrow band
since 2000.
Rumors about the yuan's
reappraisal seem never-ending; but none of them
has turned out to be true so far, and currency
traders are still waiting for the "big surprise"
to come.
(Copyright 2005 Asia Times Online
Ltd. All rights reserved. Please contact us for
information on sales, syndication and republishing.) |
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