China currency speculation swirls ahead of meeting
26 November 2004
BEIJING: Speculation that China may decide to revalue its currency in the next few days mounted yesterday, with some analysts saying Beijing could reach a decision at an annual high-level economic meeting this weekend.
Others said that while currency reform would be discussed at the closed-door Central Economic Work Conference, the government was more likely to hammer out long-term goals rather than prescribe immediate action.
"Signals emerging from Beijing in recent weeks indicate that a currency revaluation will happen, and this marks a sharp contrast to Beijing's defensiveness on the issue over the past two years," Eurasia Group, a research and consulting firm, said in a report.
Officials at the central bank and foreign-exchange regulator declined to comment on the talk of a revaluation.
Traders reacted to market chatter by increasing the expected rise in the yuan against the dollar to the highest levels since October last year.
The one-month contract for non-deliverable forwards (NDFs) had priced in an advance of nearly one per cent, while one-year NDFs had priced in a gain of nearly six per cent.
NDFs are dollar-based derivatives, traded in offshore markets, that allow investors and speculators to take positions on expected changes in the yuan.
AdvertisementAdvertisementChina, which now boasts the world's seventh-biggest economy, has been under intense pressure to overhaul its policy that keeps the yuan confined to a razor-thin band near 8.28 to the dollar.
Countries like the United States have urged Beijing to allow the yuan to float freely, saying the peg is too low and makes Chinese exports unfairly cheap. Chinese officials have been adamant that any change will be gradual.
Arthur Kroeber, an economist and managing editor of The China Economic Quarterly, said he was "highly sceptical" Beijing would tinker with the currency while it is busy trying to engineer a soft landing for the economy.
"The NDF market...has a really horrible track record of predicting anything. It's been up and down and nothing has changed in nine years. It was highly predictive of a revaluation in 1998," Kroeber said, referring to the Asian financial crisis when many expected China to devalue the yuan.
"It was wrong then and I think it's equally wrong now."
Expectations of a currency change have been intensified by a surprise move in late October to raise benchmark interest rates, and by a series of steps making it easier for Chinese to take foreign currency out of the country.
"Some people are saying it could happen after Thanksgiving. Others say next week," said a currency trader. Zhao Xijun, an economics professor at People's University in Beijing, said the government meeting would stick to the official line that the yuan should stay "basically stable", a phrasing that wouldn't rule out a change such as a modest widening of the trading band.
The Eurasia Group report acknowledged that policy makers would probably hold their cards close for a while.
"Even if a decision on currency revaluation is made during the conference, China's leaders are not likely to act immediately. But post-conference official comments may offer a clearer indication of the Beijing's intentions."
stuff.co.nz |
