This talk of a Chinese Yuan devaluation could have assisted Gold in it's rally today. I know I have posed the thesis
to Heinz blasnik and a few others that it's only a question of time until they devalue with the weakening of the
Yen and other Pac-Rim currencies.
China Might Be Preparing For Possible Yuan Devalution
By OWEN BROWN
Dow Jones Newswires
May 18, 2001
BEIJING -- China appears to be building a case for a yuan devaluation with a foreign-trade ministry outlook released Friday warning of the likelihood of a shrinking trade surplus this year.
The release of the Ministry of Foreign Trade and Economic Cooperation, or Moftec, quarterly outlook comes only days after a central bank report warned of the threat to China's competitiveness posed by a weakening yen.
Analysts say that unlike 1999, when the Clinton administration urged China to stand firm in maintaining the stability of the yuan, strained relations with Washington mean Beijing is less likely to heed such a request. Analysts also think the Bush administration isn't likely to repeat the joint U.S.-Bank of Japan intervention that previously rescued the yen.
As a fall in demand linked to the global economic slowdown is eroding China's trade position, its export competitiveness is being further undermined by a>b> 10% appreciation of the yuan against Japan's yen and the South Korean won in recent months.
The Moftec outlook forecasts imports will grow faster than exports this year, leading to a narrower trade surplus. Trade figures released this year showed China's trade surplus has fallen to $5.4 billion in the first four months of this year from $7.3 billion in the same period last year.
"China needs to take measures to improve the competitiveness of its exports," the trade ministry's outlook says, without specifically mentioning a currency devaluation.
The report says one of the factors weighing on trade performance is the weakness of Japan's yen and other regional currencies, which is eroding the price competitiveness of China's exports. The global economic slowdown and reemergence of trade protectionism also threatens to reduce China's exports this year, it says.
In a report issued Wednesday, China's central bank also warned that the continued weakening of the yen is having a negative influence on trade. "The continued devaluation of yen will impose pressure on the stability of yuan," the People's Bank of China quarterly monetary policy report said.
The central bank said demand for China's exports will fall due to the sluggish U.S. and Japanese economy, and that fall will also threaten the stability of the exchange rate. However, the report said an upward trend in foreign investment should help cushion some of those factors.
Though it didn't mention the possibility of a devaluation, the PBOC report said, "China should continue a policy of expanding domestic demand, implement a proactive fiscal policy, maintain a stable and healthy monetary policy, overhaul and standardize the order of the market economy and expand the domestic market."
China's currency is only convertible on the trade account and is kept within a tight range relative to the dollar. Therefore, the yuan tends to appreciate against regional currencies in line with any strengthening in the greenback. The currency usually trades in a narrow band around 8.27 yuan to the dollar.
Although the central bank didn't overtly threaten a devaluation, analysts believe China is saber-rattling to prod Japan and the U.S. into action to prevent any further slip in the yen.
"The central bank's statement should be viewed as a veiled warning to U.S. and Japan to maintain the stability of the yen," DBS Bank analyst Philip Wee said in a research note.
But a Bank of America research note warned that the Bush administration is less likely to join with the Bank of Japan to prop up the yen. In 1998, the U.S. and Japan intervened in the market to push the currency back above 140 yen to the dollar. In 1995, the two countries, with the help of some European countries, also jointly intervened to push the value of the then-strong yen down against the dollar. |
