Investors Cut Bets China Will Ease
Yuan's Peg as Inflation Ebbs
April 6 (Bloomberg) -- China is less likely to ease the yuan's peg
to the dollar because inflation is stable, said investors and traders
including George Wong of HVB Group in Hong Kong.
``I don't believe China will bow to any external pressure,'' said
Wong, 37, director at the Hong Kong unit of HVB, Germany's
second-biggest bank. He said he has reduced positions that would
benefit from a yuan appreciation. ``China would prefer to see how
its economy shapes up after the first half.''
China's economy expanded 9.1 percent last year and the nation
has maintained its currency at 8.277 per U.S. dollar since 1995.
Bank of China Governor Zhou Xiaochuan, 56, said in an interview
on March 30 in Lima that China's economic growth rate, targeted
at 7 percent, won't cause inflation to get out of control, and ending
the fixed rate may damage the U.S. by hurting global trade.
His comments came a day after Treasury Secretary John Snow said the yuan won't trade freely ``immediately.''
Consumer inflation slowed to a 2.1 percent annual pace in February, easing concern the peg is sparking price increases.
China's need to buy dollars to maintain the yuan's value contributes to accelerating inflation because it has flooded the system
with cash.
Expected Widening
The fixed exchange rate has also helped prompt a record trade surplus of $124 billion with the U.S. last year and, by keeping
costs down, helped China overtake America as the world's biggest destination for foreign direct investment.
Wong said he expects China to widen the band in which the yuan trades to about 2.5 percent above and below the fixed
exchange rate, compared with 0.3 percent now. The change won't take place until the fourth quarter, so he has spent the past
four to six weeks reducing bets on its appreciation, Wong said.
Forward contracts, which allow investors to bet on the future value of a currency that isn't convertible, yesterday showed the
yuan would rise to 7.929 in a year if freely traded. The implied value of the currency has been retreating since appreciating to
7.762 on Jan. 7. The contracts let investors protect the value of investments that are denominated in yuan.
`Why Move?'
Snow, Japanese Finance Minister Sadakazu Tanigaki and European Union Trade Commissioner Pascal Lamy are among
politicians seeking a more flexible currency policy from China.
The U.S. was the biggest market for Chinese exports in 2003, accounting for 21.1 percent of total sales, followed by Hong
Kong with 17.4 percent and the European Union's 16.5 percent, according to Chinese government figures.
China posted a $7.9 billion trade deficit for the first two months of the year, according to the Commerce Ministry. The deficit
was the first since March 2003. A deficit typically weakens a currency by boosting demand for money to buy imports.
``With no inflation threat and a trade deficit, why would China want to move?'' said Frank Gong, 40, chief strategist in Hong
Kong at Bank of America Corp., who also used to work at the Federal Reserve in Washington.
Ten of 16 analysts surveyed by Bloomberg News last month expect China to amend its currency policy in the second half of
the year. The government may revalue the currency, set the yuan's value against a basket of currencies or widen the band in
which the yuan fluctuates, they said.
Gong anticipates China will in the third quarter widen the trading range for the yuan to as much as 3 percent above and below
the pegged rate.
Five strategists, including Andy Xie at Morgan Stanley and Qu Hongbin at HSBC Holdings Plc in Hong Kong, expect there will
be no change this year. Only Goldman Sachs Group Inc. said China may move to a freer policy by midyear.
Sakakibara's Message
Goldman forecast in June China would allow the yuan to move by 2.5 percent above or below the fixed rate by Dec. 31 and by 5
percent within 12 months. A revaluation ``could occur at any time,'' Jim O'Neill, 47, Goldman's London-based head of global
economic research, said in a March 22 report.
Traders betting on an appreciation of the yuan may help delay any shift, Eisuke Sakakibara, formerly Japan's top currency
official, said in an interview in Tokyo on March 26.
Sakakibara, 63, said China's monetary authorities told him the week of March 22 that the peg will remain unchanged as long as
investors hold a large amount of yuan that would allow them to benefit from a revaluation.
On March 23 China tightened rules on the sale of foreign currency to control inflows of capital betting on the yuan's
appreciation. Starting April 1 local residents must show identification cards and documents verifying the legitimacy of funds
when they sell the equivalent of more than $10,000 to banks, the State Administration of Foreign Exchange said on its Web
site.
Kerry's Stance
Pressure for a policy shift may intensify as the November U.S. presidential election nears, said HSBC's Qu. Democratic
presidential candidate John Kerry said on March 26 he will hold China ``accountable when they manipulate their currency to
inflate their exports and depress ours.''
The U.S. economy has lost 2.6 million manufacturing jobs since March 2001. Non-manufacturing businesses accounted for all
of the 308,000 jobs created last month, the Labor Department said Friday. Payrolls have grown by 115,000 workers on
average for the past six months, compared with a 207,000 monthly average during the comparable period after the
1990-1991 recession.
``No matter how long it is postponed, the current official thinking on this is that sooner or later China still has to face this
task.'' said Fred Hu, Goldman's Hong Kong-based chief China strategist. quote.bloomberg.com |
