China to let the yuan appreciate gradually; no drastic revaluation
Friday, January 28, 2005 7:34:29 AM
afxpress.com
---- by Lara Wozniak ---- HONG KONG (AFX) - China will not undertake any sweeping revaluation of the yuan, but is likely to widen the trading band and gradually appreciate the unit over time to ensure an orderly transition to a more flexible currency regime, analysts said
Last year many market watchers wrote in their research reports and told the media that China, which has pegged the yuan at about 8.28 to the dollar since 1994, would revalue it upwards in 2004. But that did not happen. Now ahead of the meeting of finance chiefs of the Group of Seven nations on on February 4-5, analysts are more cautious, with the buzzwords being "possible", "mild" and "gradual". China's finance minister Jin Renqing and the People's Bank of China (PBoC) governor Zhou Xiaochuan will be attending the G7 meeting as special invitees. Chinese state media reported this week that Jin is likely to discuss the yuan's exchange rate and push for measures to prevent major foreign exchange fluctuations at the meeting
Meanwhile, a spokesperson for PBoC told XFN-Asia today that comments by a member of the bank's monetary policy committee that it is time for a revaluation of the yuan do not reflect the views of the central bank
"Yu (Yongding)'s comments do not represent opinion of the central bank or the monetary policy committee. It is purely his personal opinion," the spokesperson said. Yu was quoted in media reports from the World Economic Forum in Davos, Switzerland, as saying that it is time for more flexibility in the exchange rate and that meant a revaluation
[Looks like we have a definite answer Yiwu. NO CHANGE for "a while, possibly a much longer while than people think". Do you agree? Mish]
Analysts said it is difficult to predict when exactly China will move on the currency front
"It's possible they could revalue this year but it is one hundred times more difficult to predict what China is going to do than to predict the (actions of the) Fed," said Yonghao Pu, head of Asia regional research for UBS Wealth Management, referring to the US Federal Reserve
"It is likely they (Chinese authorities) will continue to let the currency gradually appreciate." Hong Liang, an executive director and China economist at Goldman Sachs Asia, argues that "mild renminbi revaluation" engineered through a "gradual widening of its trading band" is how China should move forward. "It will move to a basket-band crawl system, similar to the Singaporean arrangement," she said, adding that she envisions a 2.5 plus or minus band. Since 1981 Singapore has used a "managed float" exchange rate based on the appreciating trend against the main global currencies, including the US dollar, the yen and the Deutsche mark and now the euro. New York-based Clyde Wardle, a currency strategist for HSBC, perhaps takes the most conservative view, saying that a full-fledged currency revaluation could be 10 years away. "It's worth remembering that first, the focus for Beijing is on long-term economic stability and job strength," says Wardle, noting that he thinks the current administration expects to be in power for at least another decade and is planning according to that time line. "Any changes therefore will be very gradual." The one point most analysts agree upon is that the adjustment of the currency, however and whenever it takes place, will happen on China's terms. "China will consider its domestic consideration first," UBS' Pu said in a recent press conference, emphasizing the word domestic. "Then it will take into consideration pressure from the US and the IMF." Speaking to XFN-Asia recently on the telephone, he added: "In 1997 everyone said China was going to devalue, I said then, it's not going to devalue. Listen to China. Listen to what the officials are saying. That's what I'm saying again now." Earlier this week, Li Deshui, head of China's National Bureau of Statistics and a member of the monetary policy committee of its central bank, reiterated that the time is not right to drop the yuan's peg to the dollar. Meanwhile, US President George Bush said at his first press conference in his second term that he has been discussing currency controls with China
On the same day, Zhu Guangyao, head of the Finance Ministry's international department told a business forum that "For any country the exchange rate issue should be decided by the sovereign state."
[Yiwu is this a polite way of telling Bush and Snow to butt out? Mish]
According to the official numbers, China's economy is still powering ahead. The National Bureau of Statistics (NBS) announced that China's gross domestic product grew 9.5 pct last year, 0.2 pct more than the revised expansion recorded in 2003, despite official efforts to reign in growth. In addition to the continued rapid growth, China's mounting supply of foreign-exchange reserves, which reached 609.9 bln usd at the end of last year, is putting pressure on Beijing to let its currency appreciate in some manner. But on the flip side, Chinese authorities wil take comfort from the fact that inflation appears to be easing and credit growth is showing a decline
The NBS said China's consumer-price index (CPI) rose 2.4 pct year-on-year in December, slowing from a growth rate of 2.8 pct in November
And the People's Bank of China's credit-tightening measures such as increasing required deposit reserves ratio and hiking interest rates to tighten money supply and control credit growth, appear to be working. The central bank set a growth target of 2.66 trln yuan for lending in 2004, but banks lent only 2.26 trln, compared with the 2.77 trln recorded in 2003
"They would move if they felt it would help them manage the economy but I think right now that they believe the monetary tightening measures used so far -- administrative controls and interest rates -- are having the right impact as seen in the decline in credit growth and easing in inflation," said Brian Coulton senior director for sovereign ratings at Fitch Ratings in Hong Kong
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