Renminbi to rise 13% by year end, says Merrill
By Victor Mallet and Francesco Guerrera in Hong Kong
Published: March 3 2004 13:30
Beijing will revalue the renminbi by 13 per cent at the end of the year to cool an overheating economy, Merrill Lynch predicted on Wednesday.
"We think China will make a big move this year," T.J. Bond, chief Asia-Pacific economist for the investment bank, told reporters at the launch of a report on Beijing's controversial foreign exchange regime.
Mr Bond said the renminbi, which trades in a very narrow band around Rmb8.28 to the US dollar, would probably be revalued by 10 per cent against the dollar and would then be pegged to a basket of currencies in a 5 per cent band, whereupon it would rise from an initial midpoint to the top of its range. The basket was likely to be dominated by the dollar, the yen and the euro.
China has been under pressure for more than a year to revalue its currency. US politicians complain that cheap Chinese exports compete unfairly with US products and put Americans out of work.
However, Mr Bond and other analysts believe China will act not in response to US complaints but because the inflationary pressures on the Chinese economy will become intolerable in the months ahead.
On Tuesday, Alan Greenspan, chairman of the US Federal Reserve, said Chinese central bank purchases of dollars could lead to excessive monetary expansion and overheating of the Chinese economy. He also said Japan's "awesome" accumulation of dollar reserves could become problematic for Japan.
According to UBS, the investment bank, January 2004 was a record month for Asian foreign exchange reserve growth. After adjusting for exchange rate effects, the 11 main Asian economies had official net foreign exchange inflows of $91bn in January, and total reserves reached $1,990bn. Japan and China are the main buyers of dollars.
Several economists in Asia predict that China will make a modest revaluation of the renminbi and will soon move from a dollar peg to a basket of currencies. Speculation has been fuelled by the government's move to limit discussions on the issue with foreign analysts since the middle of last year.
The Merrill Lynch forecast, however, is the boldest so far and is based on the assumption that Beijing knows a gradual revaluation would fail to have the desired effect and would in fact prompt further currency speculation. Billions of dollars of "hot money" have already flooded into China in the expectation of a rise in the renminbi.
A sharp revaluation of the renminbi would have an impact on other Asian currencies and on the market for US Treasury bills, and could prompt a slowdown for East Asian exports and economic growth in 2005 and beyond.
Mr Bond said the South Korean won and other regional currencies would appreciate on the back of a rising renminbi, and he predicted that the Malaysian ringgit would be unpegged from the US dollar next year. |
