China Says No Yuan Change in `Foreseeable Future' (Update13)
July 26 (Bloomberg) -- China's central bank said it won't revalue the yuan again in the ``foreseeable future,'' dismissing speculation that last week's appreciation is the first of many.
Chinese companies need time to adjust to the 2.1 percent revaluation of July 21 and the shift will help curb the nation's trade surplus, the People's Bank of China said. Federal Reserve Chairman Alan Greenspan is among U.S. officials who called the change ``a first step,'' and forward contracts show investors expect a gain of 4.9 percent in the next year.
``The notion that the 2 percent revaluation is only an initial adjustment and that the central bank will further adjust the rate in the foreseeable future is wrong,'' the People's Bank of China said in a statement today in Chinese on its Web site.
China's reluctance to make further changes may exacerbate trade tensions between China and the U.S. Chinese President Hu Jintao let the yuan rise after criticism from the Bush administration, the U.S. Congress and the European Union, which said the decade-old peg of 8.3 per dollar gave China an unfair trade advantage.
U.S. senators, including Republican Charles Grassley and Democrat Max Baucus, suggested they will withhold judgment on China, given last week's change was the first since 1995.
``China plays things very close to the vest and you don't want to rely too much on what they say,'' Grassley, a Republican from Iowa and chairman of the Senate Finance Committee, said in Washington after a committee meeting. ``They have an inferiority complex and they don't want anyone to tell them what to do.''
`Slap on Wrist'
The comments may be aimed at reducing bets by hedge funds and other large speculators that they can force changes in the yuan's value, said Steve Barrow, a currency strategist at Bear Stearns Cos. in London. Li Deshui, a member of the central bank's monetary committee, said in an interview on July 22 that policy makers fear a plunge in the yuan, much as happened to the Korean won and Thai baht during the 1997 Asian financial crisis.
``This is part clarification and part a slap on the wrist for those in the market who thought there was more leeway in the decision China took last week,'' said Barrow.
U.S. Senator Charles Schumer, a New York Democrat and author of proposed legislation that threatens new duties on Chinese goods, said he will monitor China's actions closely.
``While the Chinese Central Bank has said that they will not do another fixed valuation in the near future, we trust that the Chinese will allow market forces to work,'' Schumer said in a statement.
U.S. Jobs
Exports, which account for almost a third of China's economy, surged about 33 percent in the first half from a year ago, an increase some legislators say has contributed to the loss of 1.4 million U.S. factory jobs since the end of 2001.
``We should expect in the not-so-distant future that you will begin to see U.S. administrators or officials come back and put pressure on China,'' said Bhanu Baweja, a currency strategist in Singapore at UBS AG, the second-largest currency trading bank in the $1.9 trillion-a-day market.
UBS predicts the yuan will strengthen to 7.95 per dollar by year-end and 7.75 by the end of December, 2006.
The adjustment in the yuan, which is a denomination of China's currency, the renminbi, will be gradual, and focused more on improving the foreign-exchange system than managing the rise or fall of the currency's level, the central bank said. Traders pared bets on a gain in the yuan today, forward contracts show, and the dollar rose against the yen.
Appreciation
``The Chinese are making it clear it's not a one-way bet for speculators,'' said Ian Stannard, a currency strategist at BNP Paribas SA in London. ``It's going be a very gradual process and every so often the Chinese authorities will allow some further and gradual appreciation.''
China's currency would rise to 7.7325 against the dollar in a year if freely traded, non-deliverable forward contracts showed at 3 p.m. in Hong Kong, down from 7.7275 late yesterday.
In the first half of the year, China's exports rose 32.7 percent from a year ago to $342.3 billion and imports increased 14 percent to $302.7 billion, according to the customs bureau.
Greenspan told Congress on July 21 that China's revaluation is ``a good first step.'' Schumer said the same day ``if there are not larger steps in the future, we will not have accomplished very much.''
Under changes to yuan trading effective from July 21, the yuan will be allowed to fluctuate against an undisclosed basket of currencies. The People's Bank of China allows a daily move of 0.3 percent against the dollar.
``China's reform puts a mechanism in place that allows for greater flexibility over time determined by market supply and demand forces,'' said Tony Fratto, spokesman for U.S. Treasury Secretary John Snow. ``We will be closely monitoring the operational performance of this mechanism.''
`Broad Trade Balance'
The yuan closed today at 8.1099 per dollar, according the fixed rate published by the State Administration for Foreign Exchange, from 8.1097 late yesterday.
The size of the adjustment is ``basically satisfying the need to achieve a broad trade balance in goods and services,'' the bank said today. It also took into account ``the resilience of domestic enterprises to absorb the risks.''
China's export growth may fall to 10 percent this year if the yuan were allowed to appreciate by 3 to 5 percent, the National Bureau of Statistics said on May 10.
``Of course they're not going to announce any future revaluations now,'' said Senator Max Baucus of Montana, the senior Democrat on the Senate Finance Committee. ``Their action last week was very helpful. The change was not large in amount but it was huge in significance and indicated that China wants to participate in the world and not go it alone.''
Goldman Estimate
Goldman Sachs Group Inc. estimated in April that a 5 percent yuan appreciation would cause most of China's trade surplus to disappear, while a 10 percent strengthening would lead to a 15 percent drop in exports and result in a ``small deficit.'' That remains Goldman's estimate, said Thomas Stolper, a global markets economist at the firm in London.
Japan's currency has lost more than half of its 2.3 percent advance against the dollar on July 21, which was the biggest gain in more than three years. The yen fell to 112.33 at 10:57 a.m. in New York from 111.49 late yesterday.
Forwards are agreements in which assets are traded at fixed prices for later delivery. Yuan forwards are non-deliverable because they are settled in dollars, not local currency
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