[They could be all wrong<g>]--"China seen pegging yuan to a currency basket in 2005"
By Toni Vorobyova
REUTERS
4:30 a.m. February 9, 2005
LONDON – China will loosen its grip on its yuan currency in the second half of this year and most likely peg it against a basket of currencies instead of solely against the dollar as now, according to a Reuters poll of 44 currency strategists.
The median forecasts in the Feb. 7-9 survey gave a 20 percent chance that China will make some sort of adjustment to its currency peg by the end of June, rising to a 62.5 percent chance of doing so by year end.
"We think that's part of (China's) long term plan to move towards more currency flexibility. They've committed to that in public and we expect a small step in that direction in 2005," said Daniel Katzive at UBS.
China has repeatedly pledged to move towards a flexible exchange rate but has declined to set a timetable.
It currently keeps the yuan (CNY-CFXS) in a band of 8.2760 to 8.2800 to the dollar, a level which is widely seen as undervalued and which has been criticised by the United States as giving Chinese exports an unfair advantage.
Eighteen of the 41 strategists who answered the question thought the yuan was undervalued by up to 10 percent, fifteen said by 10-20 percent and eight said by over 20 percent.
"Traditional fair value models are likely to put the undervaluation accumulated over the past 10 years to about 15 percent," said Kornelius Purps at HVB in Munich.
The majority – 28 of the strategists – thought China was most likely to ditch the current dollar peg in favour of a basket of currencies this year.
"They will move to a basket of currencies – at least the Japanese yen, the U.S. dollar and the euro and possibly also some smaller Asian currencies," said Mika Erkkila at Nordea Markets in Helsinki.
However 16 respondents expected China to simply revalue the yuan against the dollar – either through a direct revaluation or by widening the trade band.
"All their domestic contracts and their trade contracts with their Asian partners are denominated in dollars, so that's what matters," said Marvin Barth at Citigroup in London. "If they move to a band widening they get to control exactly how much volatility they are experiencing versus the dollar."
The move – whatever shape it takes – will be the first step on the slow road to a fully-convertible currency.
"A fully floating currency may happen within five years," said Barth. "A fully convertible capital account is probably a longer process."
Probabilities for the likelihood of a move by China this year ranged from five to 100 percent. Some strategists said China would be more likely to wait and gauge the effect of recent reforms on the economy first.
Overall, analysts have slightly downgraded their views compared to a similar Reuters poll in January, in which they gave a 65 percent likelihood of China adopting a more flexible exchange regime this year.
Since then, remarks from China's central banker and finance minister at the February meeting of the Group of Seven wealthy nations, were interpreted by analysts as signalling Beijing's resolve not to rush to reform.
Chinese non-deliverable forward rates (CNYNDF-) are currently implying a rate of 7.948 yuan per dollar in 12 months – equivalent to a smaller appreciation of around 4 percent, down from more than 5 percent appreciation priced in late January, before the G7 meeting.
(Additional Reporting by Natalie Harrison) signonsandiego.com |
