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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (34018)	7/22/2005 3:46:21 AM
From: regli	Read Replies (1) \| Respond to of 116555

China frowns as markets bet on next yuan move today.reuters.co.uk Fri Jul 22, 2005 8:21 AM BST By Alan Wheatley and Lu Jianxin BEIJING/SHANGHAI (Reuters) - China signalled on Friday it was opposed to a further big rise in the yuan as markets bet that Beijing's 2.1 percent revaluation would be just the first stage in a long upward march for the currency. The yuan began trading in Shanghai at 8.11 per dollar, the new rate announced on Thursday evening, and then hugged a tight range of 8.11 to 8.1105 under the watchful gaze of the central bank. Financial market derivatives outside China used to bet on the future value of the yuan showed that traders expected the currency to be worth 7.64 per dollar in one year's time, which would be a rise of 6.15 percent. But the official China Daily newspaper tried to calm talk the currency would lurch higher. "Expectation for a bigger appreciation of the yuan's value was, and will be, unrealistic," the paper said in an editorial. The editorial is not necessarily a statement directly from the authorities. But, as an official organ, the paper is unlikely to publish any view that would meet with government disapproval. While markets still expect big yuan gains later, currency traders turned more cautious about an immediate flow of money into Asian currencies. The dollar clawed back close to one percent against the yen after the Japanese currency on Thursday scored its biggest one-day gain in three years with a rise of more than two percent. Equity investors also were wary, with export-heavy stock markets such as Japan and South Korea suffering losses. Led by the United States, government leaders and central bankers from a raft of China's trading partners welcomed the move, which came after two years of pressure from foreign governments and global markets. "They've put in place a mechanism that provides room for significant movement over time in the currency, and they've expressed a commitment to using market forces to let the currency move," Treasury Secretary John Snow said. But the China Daily editorial suggested China was still concerned about fresh pressures for more yuan appreciation. The revaluation, from 8.28 per dollar, would draw more speculative funds into China in anticipation of a further appreciation, the newspaper said. That could make it more difficult to restore order to the property sector, where a surge of hot money inflows has sent prices spiralling. "Regulators should be vigilant to development in this regard," the paper said. A FIRST, SMALL STEP The Commerce Ministry was less worried, saying the revaluation would help promote balanced growth in exports and imports but would not have a major impact on overall trade. Many economists agree. They expect China, with its cheap labour and huge, efficient factories to be able to absorb the extra cost that a revaluation entails. China's benchmark stock index rallied more than 2 percent. Shares in airlines and oil companies, which have most of their costs and debt in dollars, led the advance. "The yuan move is good news for the stock market," said Dong Lianghong, a fund manager at Boshi Fund Management Co. Ltd.. "But since Beijing has taken a gradual approach to reforming its currency regime, uncertainties will linger in the near term and limit further rises." The Asian Development Bank estimated the revaluation could shave one quarter to one half of a percentage point off of economic growth next year in China, which has been an engine of world economic expansion over the past few years. But it said the pain was worth it. "While there is a short-term downside in terms of losing a little bit of their flexibility in exports, over the medium- to long-term that would be more than compensated by more efficient allocation of resources," ADB chief economist, Ifzal Ali, told Reuters. PATIENCE Under the new currency regime adopted along with the revaluation, China has given itself the flexibility to make incremental increases in the yuan. It will value the yuan against a basket of currencies of China's main trading partners and said it would be allowed to rise or fall by 0.3 percent a day against the dollar and by 1.5 percent against other currencies. "Making the currency flexible will expand China's policy options to manage its economy better, which will lead to stable growth of its economy and that will be a plus for Japan's economy as well," Japanese Finance Minister Sadakazu Tanigaki said. JP Morgan Chase's chief economist for Asia, Frank Gong, said he expected the yuan to be 10 percent stronger in a year's time. But others said the Chinese authorities, conservative by nature, were likely to wait patiently to test economic and political reaction to the shift before taking major new steps. After all, China has given itself the same flexibility for creeping appreciation since 1994 but has not used it since 1996. Sitting tight at the yuan's new level could keep alive tensions with the United States, which has been a vocal critic of China for maintaining for almost a decade what it saw as an undervalued exchange rate that handed Chinese exporters an unfair advantage on world markets. "This is the Chinese taking a step, but a step that I think will widely be regarded as tokenism rather than substance. So I think politically it is not going to get them very far," said Kenneth Lieberthal, a China expert at the University of Michigan. That won't be good news for President Hu Jintao, set to make his first visit to the United States as Chinese leader in September and facing criticism over everything from his country's economic policies and booming textile trade to its military rise.